Termination of Solar Power Agreement: Supreme Court Orders Penalty but Restores Contract

Disputes related to renewable energy agreements and power purchase contracts often involve complexities regarding land acquisition, commissioning deadlines, and contractual penalties. The case of M.P. Power Management Company Ltd. vs. ReNew Clean Energy Pvt. Ltd. revolved around the termination of a power purchase agreement (PPA) due to delays in commissioning a solar power project. The Supreme Court, in its judgment dated April 5, 2018, ruled that the termination of the agreement was arbitrary but upheld the imposition of a penalty for the delay.

This ruling is significant as it provides clarity on the enforcement of conditions under power purchase agreements while ensuring fairness in cases where delays occur due to unavoidable circumstances.

Background of the Case

The dispute arose when M.P. Power Management Company Ltd. (MPPMCL) initiated a bidding process for the procurement of 300 MW of solar power under a competitive tariff-based selection. ReNew Clean Energy Pvt. Ltd. (ReNew) was awarded a 51 MW project at a tariff of Rs. 5.457/kWh for a period of 25 years. A Power Purchase Agreement (PPA) was executed on November 10, 2015, and a performance bank guarantee of Rs. 15.3 crore was provided.

According to the PPA:

• The project had to achieve Conditions Subsequent within 210 days of the agreement date (i.e., by June 7, 2016).
• An additional nine-month extension was available with penalties if the conditions were not met.
• Failure to meet the deadline beyond the extension period could lead to termination and forfeiture of the performance guarantee.

ReNew faced issues in obtaining land for the project. Although the Collector of Rajgarh allotted 96.73 acres for the project in April 2016, the land was encroached upon, making it inaccessible. After multiple attempts to resolve the issue, ReNew requested a change in location, which MPPMCL approved on December 29, 2016. Following this approval, ReNew acquired 253 acres in Ashok Nagar and started construction.

On July 10, 2017, ReNew informed MPPMCL that the project was in the final stages and would be commissioned by August 31, 2017, ahead of the final deadline of September 7, 2017. However, MPPMCL terminated the contract on August 11, 2017, citing delays.

Legal Proceedings

High Court Decision: ReNew challenged the termination before the Madhya Pradesh High Court, which ruled in its favor, holding that:

• The delay was due to unavoidable circumstances (encroachment and relocation).
• ReNew had acted diligently and had already reached the final commissioning stage.
• The termination of the contract was unfair and arbitrary.

The High Court, however, allowed MPPMCL to invoke the bank guarantee and impose a penalty of Rs. 11.95 crore.

Appeal to the Supreme Court: MPPMCL challenged the High Court’s ruling, arguing that it had the right to terminate the contract for delay beyond the nine-month extension.

Key Legal Issues

The Supreme Court examined the following issues:

• Whether the delay in commissioning was justified under the terms of the PPA.
• Whether MPPMCL was justified in terminating the agreement.
• Whether the penalty imposed was valid.

Arguments by Both Parties

Petitioner’s Argument (M.P. Power Management Company Ltd.):

• The contract allowed termination if the project was not completed within the extended deadline of nine months.
• ReNew was responsible for land acquisition and failed to complete it within time.
• The contract’s terms were binding, and the High Court exceeded its jurisdiction by setting them aside.

Respondent’s Argument (ReNew Clean Energy Pvt. Ltd.):

• The delay was due to unforeseen encroachment and not due to negligence.
• MPPMCL approved the change of location in December 2016, and the project was nearing completion by August 2017.
• Termination of the contract was disproportionate and unfair.

Supreme Court’s Observations

The Supreme Court, comprising Justices Ranjan Gogoi and R. Banumathi, upheld the High Court’s ruling, emphasizing that the termination was arbitrary but the penalty was justified.

Key Excerpt from the Supreme Court Judgment:

“The respondent had faced unavoidable circumstances in land procurement, but it acted in good faith and completed substantial work. The termination was unjustified in these circumstances.”

The Court further held:

“The contract does permit imposition of a penalty for the delay. Therefore, the respondent is liable to pay Rs. 11.95 crore as per clause 2.5.1 of the PPA.”

Final Verdict

The Supreme Court ruled:

• The termination of the contract by MPPMCL was set aside.
• The project could continue as per the agreement.
• ReNew Clean Energy Pvt. Ltd. must pay the penalty of Rs. 11.95 crore within four weeks.
• The appeal was dismissed, and the High Court’s judgment was upheld.

Impact of the Judgment

This ruling has significant implications for power purchase agreements and renewable energy projects:

• It reinforces that delays due to genuine difficulties should not lead to contract termination.
• It establishes that penalties can be imposed for delays, but termination must be justified.
• It ensures that government agencies act fairly when enforcing contracts.
• It provides clarity on force majeure interpretations in power projects.

Conclusion

This judgment upholds the balance between contractual enforcement and fairness in renewable energy projects. The Supreme Court’s ruling ensures that developers are given a fair chance to complete projects while holding them accountable for delays.

Petitioner Name: M.P. Power Management Company Ltd..
Respondent Name: ReNew Clean Energy Pvt. Ltd. & Anr..
Judgment By: Justice Ranjan Gogoi, Justice R. Banumathi.
Place Of Incident: Madhya Pradesh.
Judgment Date: 05-04-2018.

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