Supreme Court Holds Encashment of Performance Bank Guarantee a Contractual Remedy and Limits Regulatory Interference
A bench of Justices Sanjay Kumar and Satish Chandra Sharma heard an appeal by a state-owned distribution licensee challenging concurrent orders of the Karnataka Electricity Regulatory Commission and the Appellate Tribunal for Electricity which had directed restoration of an encashed performance bank guarantee, extension of contractual timelines and renegotiation of tariff for a 10 MW solar project. The appeal arose from a Power Purchase Agreement executed after competitive bidding and focused on whether the distribution licensee lawfully encashed the developer’s performance security when commercial operation proved impossible within contractual timelines because the State transmission utility delayed commissioning evacuation lines.
The Court held that the encashment was an exercise of a contractual remedy expressly conferred by the PPA and that regulatory fora had exceeded their jurisdiction in directing restitution and contractual modification. The Court, in its reasoning, observed: The Court also noted that “the requirement is not merely directory; it is a condition precedent for invoking the clause” in relation to the PPA’s Force Majeure notice provision, and reiterated that “the explicit terms of a contract are always the final word with regard to the intention of the parties.”
Background The dispute arose after the Karnataka Renewable Energy Development Limited invited bids and selected a developer to set up a 10 MW solar photovoltaic plant. The distribution licensee and the developer executed a PPA in August 2012 at a tariff of Rs. 8.49/kWh, with Conditions Precedent to be met within 240 days and Commercial Operation Date within 12 months. The evacuation scheme required two 220 kV transmission lines to be commissioned by the State transmission utility; those lines were delayed. The developer sought extensions and assistance; the licensee encashed a performance bank guarantee in November 2014 on the ground that the developer had not met CPs and COD. The State Commission issued an interim order restraining encashment on 14.11.2014 but, by its final order of 28.01.2015, found that the delay in evacuation constituted Force Majeure, directed restoration of the encashed security, extension of timelines and tariff renegotiation. The Appellate Tribunal for Electricity affirmed that order on 21.03.2018.
The licensee contended before this Court that Article 4.4 of the PPA expressly permitted encashment where the developer failed to commence supply, and that the developer had neither obtained an extension under Article 5.7 nor served the Article 14.5 Force Majeure notice which the PPA made mandatory. The developer and the State transmission utility argued that the delay was beyond the developer’s control and that regulatory relief was necessary to avoid unjust enrichment. The regulatory fora had relied on an RTI reply and contemporaneous correspondence showing KPTCL’s admission that the 220 kV lines would be commissioned only in August 2015.
The Supreme Court construed the PPA strictly, held that relief under Article 5.7 or a valid notice under Article 14.5 was the contractual route for dealing with such delays, and ruled that invocation of the bank guarantee before the State Commission’s interim restraint order satisfied the contractual preconditions. The Court found that the regulatory directions altered the contractual allocation of risk and exceeded jurisdiction. As a result, the Court allowed the appeal, set aside the APTEL judgment dated 21.03.2018 and the State Commission order dated 28.01.2015, and disposed of pending applications.
Case Details: Case No.: CIVIL APPEAL NO. 6888 OF 2018 Case Title: Chamundeshwari Electricity Supply Company Ltd. (CESC) v. Saisudhir Energy (Chitradurga) Pvt. Ltd. & Anr. Appearances: For the Petitioner(s): [Names not indicated in the judgment] For the Respondent(s): [Names not indicated in the judgment]