Regulation 12(5) of Connectivity Regulations is Directory; Encashment of Bank Guarantee Requires Discretionary Determination of Facts.

In brief

The question

1. Whether Regulation 12(5) of the Connectivity Regulations, 2009, mandatorily requires the Nodal Agency to encash a Bank Guarantee in the event of failure to sign the LTA Agreement.

The court held

The Tribunal held that Regulation 12(5) of the Connectivity Regulations, 2009, is directory/discretionary and not mandatory

It also directed

The impugned order of the CERC dated 24.08.2015 was set aside

The matter was remanded to the CERC to conduct a fresh hearing to determine whether CTUIL was justified in encashing the BGs based on the specific facts of the Appellant's case, including the alleged impossibility of performance

The Appeal was allowed and disposed of with directions to pass a fresh order within two months

01Facts

The Appellant, a developer of a 2500 MW power plant, applied for Long-Term Access (LTA) and furnished two Application Bank Guarantees (BGs) totaling ₹2.5 Crore

p. 3

Due to environmental clearances being quashed by the High Court and subsequent prohibition of projects in the Western Ghats, the Appellant was unable to sign the LTA Agreement and decided to relocate the project

p. 6

The Appellant requested a refund of the BGs, arguing frustration of contract

p. 7

Respondent No. 4 (CTUIL) rejected the refund and moved to encash the BGs as per the Connectivity Regulations, 2009

p. 7

The Appellant filed a petition before the CERC (Respondent No. 1), which was dismissed on 24.08.2015

p. 8

The CERC held that the Regulations do not provide for force majeure exceptions regarding BG encashment if an applicant fails to sign the LTA Agreement

pp. 8-11

02Issues

i.1. Whether Regulation 12(5) of the Connectivity Regulations, 2009, mandatorily requires the Nodal Agency to encash a Bank Guarantee in the event of failure to sign the LTA Agreement.

¶ 15 / p. 12

ii.2. Whether the Appellant’s failure to execute the LTA Agreement due to factors beyond its control (force majeure) justifies the withholding or refund of the Application Bank Guarantee.

¶ 15-16 / p. 12-13

03Law Applied

The court primarily interpreted Regulation 12 of the CERC (Grant of Connectivity, Long-term Access and Medium-term Open Access in inter-State Transmission and related matters) Regulations, 2009

pp. 13-16

It relied on the principle of statutory interpretation regarding the words "May" and "Shall," citing the Hon’ble Supreme Court’s decision in Bachahan Devi v. Nagar Nigam, Gorakhpur, which establishes that "may" is generally directory unless the context implies a mandatory duty

¶ 25 / p. 20-22

It also applied the precedent from Chettinad Power Corporation Private Ltd. v. PGCIL, which clarified that Regulation 12(5) is discretionary and serves as a regulatory measure rather than a penal one

¶ 16 / p. 12

04Reasoning

The Tribunal analyzed the Statement of Reasons (SOR) for the 2009 Regulations, noting that the purpose of the BG is to "bring seriousness" to applications and ensure grid security, not to serve as liquidated damages or a penalty

¶ 28-31 / p. 23-24

The Tribunal determined that the word "may" in Regulation 12(5) confers discretion upon the CTUIL rather than a mandatory obligation

¶ 35 / p. 28

It reasoned that an automatic encashment policy, regardless of genuine hardships or force majeure events like the quashing of environmental clearances, would lead to a "serious miscarriage of justice"

¶ 35 / p. 29

The Tribunal further noted that even the CERC had previously admitted before the Delhi High Court in NSL Nagapatnam Infrastructure Pvt. Ltd. v. CERC that Regulation 12(5) was never intended to be mandatory in all cases

¶ 32 / p. 25-26

Thus, CTUIL must evaluate the specific facts and circumstances of each default before deciding to encash.