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The Change in Law clause is a cornerstone of competitively bid power projects in India. It protects parties against unforeseen legislative and regulatory changes that alter the economic assumptions on which bids are submitted. The central objective is restitution: restoring the affected party to the same economic position as if the change had never occurred. Yet, in practice, Change in Law compensation under Power Purchase Agreements (PPAs) is often determined and paid years after the expenditure has been incurred. This delay raises an important question, which can restitution ever be complete if the beneficiary receives only the principal amount without compensation for the time value of money? The issue has become increasingly significant across India's power, electricity and renewable energy sector as regulatory disputes relating to Change in Law claims continue to evolve.
The Evolution of the Restitution Principle
The principle is no longer merely contractual. Over the last decade, the Supreme Court, the Appellate Tribunal for Electricity ("APTEL") and the Central Electricity Regulatory Commission ("CERC") have consistently interpreted Change in Law clauses through the lens of restitution. The emphasis has shifted from compensating isolated costs to restoring the economic equilibrium originally contemplated by the parties at the time of bidding. This evolution has transformed Change in Law from a narrow contractual adjustment into a broader principle of commercial fairness.
The concept of restitution is embedded in the jurisprudence governing power purchase agreements. Courts and tribunals have repeatedly recognised that Change in Law relief is intended neither to enrich nor penalise either party but to neutralise the financial impact of a qualifying legal change. Once that principle is accepted, delayed reimbursement inevitably distorts the commercial equilibrium originally contemplated by the parties.
The doctrine of restitution received definitive recognition in Energy Watchdog v. CERC1, where the Supreme Court recognised that Change in Law provisions are intended to preserve the economic bargain between contracting parties. The principle was subsequently developed in Uttar Haryana Bijli Vitran Nigam Ltd. v. Adani Power Ltd.2, where the Supreme Court held that restitution necessarily includes compensation for the time value of money and that delayed reimbursement would otherwise defeat the very purpose of the Change in Law mechanism. APTEL and CERC have thereafter consistently treated carrying cost as an integral component of restoring the affected party to the same economic position that would have prevailed had the Change in Law not occurred.
Commercially, carrying cost is neither interest nor damages. It is the economic consequence of deferred restitution. Every day that reimbursement is postponed, the affected generator continues to finance a statutory burden that, under the contractual allocation of risk, ought to have been borne by the procurer. The absence of carrying cost therefore converts a neutral provisions in relation to Change in Law into an interest-free financing arrangement in favour of the beneficiary of the delay. Developers finance additional expenditure through equity, debt or internal accruals. Capital has a cost. When reimbursement is postponed, the generator bears financing costs that would not have arisen but for the Change in Law event. Carrying cost therefore represents the economic consequence of delayed restoration rather than a windfall. Excluding it shifts the financial burden of regulatory delay onto the affected party.
From Carrying Cost to Enforcement: The Emerging Debate
Recent decisions of CERC and APTEL continue to reflect this evolving approach. While earlier litigation primarily focused on whether carrying cost formed part of Change in Law compensation, more recent proceedings have increasingly addressed the consequences of delayed compliance even after compensation has been determined. Generators have argued that once the adjudicated Change in Law amount crystallises into a contractual payment obligation under the Power Purchase Agreement, continued default should trigger the Late Payment Surcharge provisions applicable to all overdue invoices. These proceedings demonstrate that the debate is gradually shifting from entitlement to enforcement.
A related issue arises after Change in Law compensation is adjudicated but remains unpaid. If the compensation becomes an amount due under the PPA, a strong contractual argument exists that continued delay should attract the Late Payment Surcharge provisions of the agreement. This approach reinforces commercial discipline and encourages timely compliance with regulatory and judicial determinations.
This raises an important distinction between two different compensatory mechanisms. Carrying cost compensates the generator until the Change in Law amount is determined and becomes payable. Once the liability is adjudicated or otherwise crystallises under the PPA, any subsequent delay arguably falls within the contractual payment regime itself. At that stage, the question is no longer one of restitution but of enforcement of a matured payment obligation. Consequently, the applicability of the contractual Late Payment Surcharge provisions merits serious consideration.
Broader Commercial and Investment Implications
The significance extends beyond individual disputes. Infrastructure financing depends upon regulatory predictability. International investors and domestic lenders evaluate not merely whether compensation is legally available, but also the certainty and timing of recovery. A compensation framework that recognises principal but ignores the cost of delayed payment artificially depresses project returns, increases financing costs and ultimately raises the cost of electricity. Restitution, therefore, is not simply a legal doctrine, it is an economic imperative.
Looking Ahead
The regulatory jurisprudence has already accepted that the objective of Change in Law is restitution rather than mere reimbursement. The remaining question is whether restitution can truly be said to occur when the beneficiary receives compensation years after the expenditure has been incurred without being restored for the lost time value of money. As regulators increasingly confront questions relating not only to carrying cost but also to Late Payment Surcharge on adjudicated Change in Law claims, the jurisprudence appears poised for its next phase. A coherent framework recognizing both timely restitution and meaningful payment discipline would enhance contractual certainty, reduce litigation and reinforce investor confidence in India's rapidly expanding power sector.
Footnotes
1 (2007) 14 SCC 80
2 (2023) 2 SCC 624
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