The Supreme Court of India held that Chamundeshwari Electricity Supply Company’s (CESC) decision to encash the performance bank guarantee furnished by Saisudhir Energy was fully valid under the power purchase agreement (PPA).

The decision, which overturned the earlier rulings of the Karnataka Electricity Regulatory Commission (KERC) and the Appellate Tribunal for Electricity (APTEL), came after the apex court found that the developer did not seek an extension through the prescribed contractual process or issue a proper notice of force majeure.

The court also made it clear that regulatory bodies cannot rewrite commercial contracts or grant remedies beyond what the PPA allows.

Background

The dispute began in 2012 when Saisudhir Energy was selected through a competitive bidding process to develop a 10 MW solar project in Thallaku village, Chitradurga district, Karnataka. A PPA was signed with CESC to sell power at a tariff of ₹8.49 (~$0.097)/kWh, which KERC had approved. The agreement required the developer to fulfill certain preconditions within 240 days and achieve commercial operation within 12 months.

The success of the project depended heavily on the completion of the 220 kV transmission lines laid by the Karnataka Power Transmission Corporation (KPTCL). When these evacuation lines were delayed, the developer requested time extensions. CESC responded that an extension could only be considered if the tariff was reduced drastically from ₹8.49 (~$0.097) to ₹2.39 (~$0.027)/kWh. The developer refused this demand and approached KERC, asking for restoration of its encashed bank guarantee, an extension of deadlines, and retention of the original tariff.

In January 2015, KERC ruled in favor of the developer, treating the delay as a force majeure event. It ordered the return of the encashed guarantee, an extension of time, and a renegotiation of the tariff. APTEL later upheld this decision in March 2018. CESC, dissatisfied with these rulings, brought the matter to the Supreme Court.

CESC argued that the PPA was a carefully structured commercial contract that contained specific remedies, including the right to encash the bank guarantee if the developer missed deadlines. The company stressed that the responsibility for seeking extensions lay with the developer, yet it had never invoked the relevant clauses. It also pointed out that force majeure could only apply if proper notice were given within seven days of the event, which never happened. For CESC, the orders of KERC and APTEL amounted to rewriting the contract, which regulatory bodies lacked the authority to do.

The developer, on the other hand, argued that the delay was entirely due to KPTCL’s failure to complete the transmission lines, which was beyond its control. It maintained that meeting deadlines was technically impossible because the project could not be connected to the grid without the evacuation lines. It described the encashment of the bank guarantee as unjust, particularly since KERC had issued an interim order restraining it.

Supreme Court’s Analysis

The Supreme Court considered five key questions. It examined the effect of KPTCL’s delay, CESC’s right to encash the guarantee, whether force majeure could apply without notice, whether the PPA was a contingent contract, and the authority of regulators to order remedies beyond the contract.

On the issue of KPTCL’s delay, it said the developer could not claim automatic extensions. The PPA required the developer to seek relief under Article 5.7, which covered extensions for delays caused by the distribution company, or Article 14, which dealt with force majeure. Since neither of these mechanisms was used, the contractual timelines stood firm.

Regarding the bank guarantee, the court found that CESC acted within its rights. The invocation took place on November 12, 2014, two days before KERC’s interim order restraining it. The performance security was encashed on December 6, 2014. This sequence of events meant the encashment was valid and could not be undone by later regulatory directions.

The Supreme Court rejected the force majeure claim, pointing out that Article 14.5 required a formal notice within seven days, which the developer never issued. It also clarified that the definition of force majeure in the PPA did not cover delays caused by another state agency, such as KPTCL. The correct remedy lay under Article 5.7, but that too was never pursued.

On the argument that the PPA was a contingent contract under the Indian Contract Act, the court disagreed. It explained that the agreement already contained detailed mechanisms for dealing with uncertainties. Invoking general contract law could not override these specific provisions.

The court emphasized that contracts signed after competitive bidding and approved by regulators must be honored strictly as written. Regulatory bodies cannot, in the name of fairness, rewrite obligations or grant reliefs not provided in the agreement.

The Supreme Court had earlier ruled that the regulatory commissions must be guided by the public interest when approving tariffs for power purchases.

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