GERC Rejects Plea to Halt Bank Guarantee Encashment in Solar Project Dispute

Summary:

The Gujarat Electricity Regulatory Commission (GERC) has rejected Enren Energy Pvt. Ltd.’s request for interim relief in a legal dispute with Gujarat Urja Vikas Nigam Limited (GUVNL) concerning delays in a significant 400 MW solar power project.[1]

Enren, the developer of the solar project, had sought to prevent GUVNL, the state-owned power distribution company, from encashing the performance bank guarantee (PBG) that was put in place to ensure the timely completion of the project. Enren attributed the project’s delays to unforeseen “force majeure” events, such as delays in securing connectivity approvals and other necessary permissions from various state authorities. These events, they argued, were beyond their reasonable control and should absolve them from the financial penalties associated with not meeting the project’s scheduled commercial operation date (SCOD). However, the GERC ruled against Enren’s request, upholding the validity of the PBG and allowing GUVNL to potentially encash it due to the project’s delay.

Case Timeline:

• 15.12.2022: Enren Energy and GUVNL sign a Power Purchase Agreement (PPA) for 400 MW of solar power.
• 15.06.2024: Scheduled Commercial Operation Date (SCOD) for the project.
• 21.05.2024: GERC hears the matter regarding interim relief.
• 28.05.2024: GERC denies Enren’s plea for interim relief.

Issue Raised:

The issue before the commission was whether GERC should grant interim relief to Enren Energy, preventing GUVNL from encashing the performance bank guarantee due to project delays attributed to force majeure events.

Appellant’s Arguments:

• The delay in project commissioning was due to force majeure events beyond its control.
• GUVNL cannot encash the PBG as the delay was not attributable to Enren.
• Encashment of the PBG would cause irreparable financial harm to Enren.

Respondent’s Arguments:

• The bank guarantee is unconditional and irrevocable, and GUVNL has the right to encash it.
• The delay in commissioning entitles GUVNL to recover liquidated damages and encash the PBG as per the PPA terms.
• The legal precedent regarding bank guarantees favors GUVNL’s right to encashment.
• GUVNL would suffer losses due to the delay as it would have to procure power at higher rates.

Order:

GERC denied Enren’s plea for interim relief, rejecting the request to restrain GUVNL from encashing the PBG. The commission ruled that the bank guarantee is a separate contract and GUVNL’s right to encashment cannot be interfered with in the current proceedings. The matter of force majeure and project extension will be decided in the main petition.

GERC primarily based its decision on the established legal principle that bank guarantees are independent contracts between the bank and the beneficiary (GUVNL in this case). This means that GUVNL’s right to encash the PBG, as per the terms of the contract, cannot be easily interfered with, even in the presence of a dispute between the parties regarding the project’s completion.

The commission clarified that while the Power Purchase Agreement (PPA) outlines the conditions for encashing the PBG, the bank guarantee itself stands as a separate legal agreement. Therefore, the GERC found that it would be premature to grant interim relief based on Enren’s claim of force majeure before a thorough examination of the facts and legal aspects in the main petition.

Additionally, the commission emphasized the established legal precedents surrounding bank guarantees, which generally favor the beneficiary’s right to encashment unless exceptional circumstances like fraud or special equities are proven. In this case, Enren had not been able to convincingly demonstrate such exceptional circumstances to warrant restraining GUVNL from exercising their right under the PBG.

Finally, the GERC’s order allowed both Enren and GUVNL to submit additional replies and rejoinders within specified timelines, indicating that the matter would proceed to a detailed hearing to address the main petition and resolve the dispute over the project’s delays and the invocation of the PBG.

Analysis:

The GERC order highlights the legal complexities surrounding bank guarantees in power projects. While Enren claims force majeure, the commission’s decision underscores the strict interpretation of bank guarantees as independent contracts. This case also demonstrates the potential financial risks faced by developers in meeting project timelines, especially in the face of unforeseen events. The outcome of the main petition will ultimately determine whether the force majeure claim is valid and whether Enren is liable for damages. However, this interim order serves as a reminder of the importance of adhering to contractual obligations in power projects.

[1] https://gercin.org/wp-content/uploads/2024/05/2341-of-2024-M-s-Enren-Energy-Pvt.-Limited-Vs.-GUVNL.pdf