Regulators Cannot Rewrite Power Purchase Agreements Under Guise Of Equity; Sanctity Of Contract Must Prevail : Supreme Court

The Supreme Court observed that under the guise of equity fairness, the regulatory or adjudicatory fora cannot override the explicit terms of a commercial contract. It added that the Power Purchasing Agreements (“PPAs”) must be enforced strictly as written, without regulators superimposing obligations not contemplated by the parties. Holding thus, the bench comprising Justices Sanjay Kumar and Satish Chandra Sharma set aside the Appellate Tribunal For Electricity's (“APTEL”) decision which directed the Appellant to restore to the Developer i.e. Respondent No. 1 herein, the amount realised from the encashment of the performance bank guarantee; extend the timelines for fulfilment of contractual obligations; and to undertake renegotiation of the tariff under the Power Purchase Agreement (the “PPA”) for a solar power project. “This Court has, in a consistent line of judgements, reiterated that regulatory or adjudicatory fora cannot, under the guise of equity or fairness, rewrite the contractual framework or superimpose obligations alien to the agreement. The PPA, being the product of a competitive bidding process and having received regulatory approval, must be construed and enforced strictly in accordance with its express stipulations. To permit otherwise would be to allow the State Commission or the APTEL to override the parties own allocation of risk under the contract.”, the court said. The dispute arose from a Power Purchase Agreement (PPA) concerning a solar power project, where the developer (Respondent No. 1) delayed the commissioning of the project. In response, the Appellant encashed the performance bank guarantee. However, the Karnataka State Electricity Regulatory Commission (KSERC) and the Appellate Tribunal for Electricity (APTEL) directed the Appellant to refund the amount realised from the encashment of the guarantee, to extend the timelines for the fulfilment of contractual obligations, and to renegotiate the tariff under the PPA. The Appellant contended that the jurisdiction of regulatory authorities does not extend to rewriting the terms of a concluded commercial contract or granting remedies beyond the agreement's framework. It argued that the invocation of the performance bank guarantee was in strict compliance with Article 4.4 of the PPA, and that the regulatory directions unjustly altered the contractual allocation of risks. According to the Appellant, the PPA provided no automatic extension of timelines, and any relief should have been sought under Article 5.7 or Article 14.5. Since the developer had failed to pursue such remedies, its claims stood foreclosed in law. On the other hand, the Respondent argued that directing the restoration of the performance bank guarantee, granting an extension of timelines for fulfilling conditions precedent, and permitting renegotiation of tariff all fell within the regulatory authorities' powers. These measures, it contended, were necessary to balance contractual obligations while serving the larger public interest of ensuring the timely commissioning of renewable energy projects for integration into the power grid. APTEL, by affirming these directions in its judgment dated 21 March 2018, had therefore committed no legal error warranting Supreme Court interference. Issue Whether the delay in commissioning the project, caused by the state transmission utility's failure to build the necessary power evacuation lines, excused the developer from its contractual obligations and prevented the Appellant from encashing the bank guarantee. Decision Setting aside the APTEL's decision, the judgment authored by Justice SC Sharma found that the regulator and APTEL had rewritten the entire contract terms, as upon examining the contract, the Court noted that the PPA contained specific mechanisms to deal with delays in the execution of the project. Article 5.7 allowed the developer to seek an extension of time through a formal application, but none was made. Article 14.5 required a mandatory written notice within seven days to invoke force majeure, but no such notice was issued. Article 4.4 expressly entitled CESC to encash the performance bank guarantee if supply did not commence on time, unless relief had been validly sought under the other provisions, the Court said referring to PPA's Articles. “The jurisdiction of the regulatory bodies is to ensure compliance with law and to adjudicate disputes within the four corners of the contract. It does not extend to recasting the contractual framework by directing restitution of amount lawfully realised under the PPA, or by mandating alterations to tariff and timelines in a manner inconsistent with the agreement. The directions of the State Commission, affirmed by the APTEL, requiring restoration of the performance security, extension of contractual timelines, and renegotiation of tariff, transgress the limits of that jurisdiction.”, the court said.The Court justified the encashment of the bank guarantee by the...

Regulators Cannot Rewrite Power Purchase Agreements Under Guise Of Equity; Sanctity Of Contract Must Prevail : Supreme Court

Yash Mittal

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