COVID-19 AS A FORCE MAJEURE EVENT IN SOLAR AGREEMENTS
The outbreak of COVID-19 has landed us in tumultuous times impacting, both the public health and safety and the global businesses and economy. In order to curb the spread of the pandemic, the Government of India has called for 3 countrywide lockdowns which started on March 25, 2020.
The solar power developers are equally affected by this pandemic; with the impact being different for under construction projects and operational projects. To avoid typical contractual repercussions in such circumstances, including liquidated damages for delay or termination; suppliers have been seeking relief by claiming force majeure.
After Solar Energy Corporation of India Ltd (SECI) wrote to 24 distribution companies and agencies, underlining the government’s notification on ‘must-run’ status and payment realization, and invoicing of renewable power projects saying that any notice regarding the Article-7 (which refers to force majeure) of signed power sale agreement (PSA) would be treated as null and void due to the directions issued by the central government; various states had issued a force majeure notice, stating that it has been forced to curtail power purchase and generation due to the ongoing nationwide lockdown.
To address this issue, the Ministry of New and Renewable Energy (MNRE) has reiterated that the “must-run” status of renewable energy projects remains unchanged during the COVID-19 lockdown period and curtailment or renewables other than for grid safety reasons would amount to deemed generation. The notice also added that some distribution companies are still resorting to the curtailment of renewable energy without any valid reasons.
[Deemed generation: the energy which a generating station was capable of generating but could not generate due to various reasons (curtailment in this case). So, if the DISCOMs curtail power for reasons other than grid security, they will still have to pay for the scheduled capacity of that renewable energy project under the deemed generation clause.]
Force Majeure Provision
Force Majeure would mean some acts, events or circumstances or a combination of acts, events or circumstances or the consequence(s) thereof, that wholly or partly prevents or unavoidably delays the performance by the Party of its obligations under the relevant agreement, but only if and to the extent that such events or circumstances are not within the reasonable control, directly or indirectly, of such affected party.
Force Majeure Event in Solar Agreements includes:
Act of God;
radioactive contamination or ionising radiation;
the discovery of geological conditions, toxic contamination or archaeological remains on the Project land;
any act of war (whether declared or undeclared), invasion, armed conflict or act of foreign enemy, blockade, embargo, revolution, riot, insurrection, terrorist or military action;
nation/state-wide strike, lockout, boycotts or other industrial disputes;
nationalization or any compulsory acquisition; and;
action of a Government Authority.
Considerations for Force Majeure Event
Notification and Reporting Requirements
Force majeure provisions often specify a time frame within which the affected party must notify the non-affected party, together with other stipulations including the form and content of a claim of force majeure and ongoing reporting obligations; failure to comply with those may preclude a party from invoking force majeure and may serve to limit the relief available to the affected party.
Some force majeure provisions provide that the event must have occurred after the effective date of the relevant agreement in order to constitute force majeure. This can present issues in interpretation when the timing of the event is difficult, or impossible, to establish with certainty, such as the outbreak of COVID-19, or any resulting travel or shipping restrictions, particularly as new outbreaks are occurring on an almost daily basis.
Hence, parties should ensure they have complied with their notification obligations under the agreements in the contractual chain to avoid being time-barred.
Gaps in the contractual chain
The entire contractual chain of agreements should be taken into consideration by the parties as downstream agreements (such as the construction contracts or the PPAs) do not provide for equivalent relief to that in the upstream contracts.
Location
It is not uncommon for force majeure relief to be limited to events or circumstances at the location in which the key obligations of the parties are to be performed, for example, the site at which the solar facility is being constructed. In such circumstances, the impact of COVID-19 on an affected Indian state-based module supplier creating delays in construction of a solar facility in an unaffected state may not entitle the facility’s developer to relief under its construction contract or power purchase agreement.
COVID-19 and Solar Developments
Particularly in the context of solar development projects, where key materials and equipment, including solar modules and transformers, are being sourced from countries affected by this strain of coronavirus, it is important to consider how delays in obtaining such materials and equipment can create issues and liability further down the chain, particularly where relief may not be equivalent or where the force majeure provisions in downstream contracts are narrower in the scope of their operation.
In solar development projects, a developer’s exposure is often compounded where the developer contracts directly with key solar equipment suppliers. In those cases, where delivery of the solar modules and/or transformer to the project site is delayed, the developer may be forced to defend against an equipment supplier’s claim for relief due to the relevant force majeure event, while simultaneously seeking to claim force majeure relief from contractual penalties arising from the delay that may be provided in the construction contract and/or power purchase agreement.
Relevant to mention here that all solar PPAs require a developer to commission the project within a specific time period; and if the project is not commissioned within such timelines then the developer is liable to pay liquidated damages to SECI/NTPC/procurer for the delay. Some of the earlier solar PPAs also provided that delays in commissioning beyond a specified period (such as 6 months post the scheduled commission date) would lead to reduction in tariff (albeit this concept is not provided for in the recent solar PPAs). These time periods are to be extended if the developer is delayed in performing its obligations on account of a FM event or procurer default.
These risks are a forceful reminder that force majeure provisions should be carefully negotiated to contemplate the unique risks of the project to which they relate. Accepting any gaps in force majeure relief between upstream and downstream contracts should be avoided unless the specific gap is a risk the project participants understand and are willing to price into their transactions.
Response of Indian Authorities
The issue whether COVID-19 would qualify to be a FM event under the solar PPAs has been put to rest by the Ministry of New and Renewable Energy’s (“MNRE”) office memorandum dated 20 March 2020.
MNRE pursuant to the MNRE order directed all renewable energy implementing agencies to treat delay on account of disruption of the supply chains due to spread of COVID-19 as a FM event. Importantly, these agencies may grant suitable extension of time for projects based on applications of the solar developers along with documentary evidence in support of their claims for disruption of supply chain.
The MNRE order is certainly a great step, though it falls a bit short of what was needed to address the concerns of the solar industry. While, it is clear now that COVID-19 would qualify to be a FM event, the relief the solar developers would be entitled to needs to be ascertained on a case by case basis. The MNRE order does not grant a blanket extension of time to all solar developers on account of COVID-19; which position is understandable from the government’s perspective. Accordingly, each solar developer wanting to get more time to commission its project needs to make an application to SECI/NTPC/or another implementing agency with supporting documents showing how it has got impacted by the COVID-19 situation. Upon receipt of such request, the authorities would determine each case on its factual position and upon being satisfied that the developer was in fact affected by the disruptions due to COVID-19, grant additional time to them for achieving commission without any damages being payable or other implications under the PPAs.
While there is no specific case where a solar developer has claimed FM on ground of epidemic or pandemic, there have been certain court cases where delay in obtaining statutory clearances for land and water despite complying with all legal requirements and non-availability or non-commissioning of transmission lines have been held to be FM events. In these cases, the court was of the view that as the delay cause was beyond the reasonable control of the developers it qualifies to a FM event and entitles them to relief in the form of extension of time for achieving commissioning.
Also, the current exemptions granted to the solar projects from the levy of inter-state transmission charges and losses. According to the current regulations, charges on transmission of electricity generated from solar and wind energy sources are exempt only for projects commissioned by 31 December 2022
In furtherance to the MHA Orders for lockdown, the Ministry of Power (“MoP”) has notified the operation of power generation utilities to be essential and granted permission for material movement needed by such utilities during the lockdown. The press release issued by MoP on 28 March 2020 inter alia stated that directions have been issued to the Central Electricity Regulatory Commission (“CERC”) to provide a moratorium of three months to DISCOMS to make payments to generating companies and transmission licensees and not to levy penal rates of late payment surcharge. Further, the State Governments were requested to issue similar directions to State Electricity Regulatory Commissions. The MoP press release also advises central government/PSU generating companies/transmission companies not to use coercive means for recovering the dues and continue supply/transmission of electricity since it is an essential service.
Referring to this MoP direction, certain DISCOMS started curtailing renewable power on the ground that a FM event has occurred and invoking FM clauses under the PPAs. To allay these fears, the MNRE on 06 April 2020 issued a clarificatory office memorandum; which mainly said that:
renewable energy power has been granted ‘must run status’ under the Indian law and this status should continue even during the lockdown period; and
the payments to renewable energy generators should be continued to be paid regularly for renewable energy power (it being a small proportion of the total proportion of the electricity generation in the country).
The COVID-19 pandemic is truly unchartered territory for everyone and thus it is hard at this stage to predict the cascading effect this pandemic would have on the solar industry.
Assertions and Defences
While it is easy to gloss over force majeure as merely “boilerplate” provisions for extremely rare occurrences, COVID-19 is a reminder that such force majeure events do happen and are one more factor to consider while negotiating contracts.
Non-executed contracts
If a party in the midst of negotiating a contract, all parties will want to safeguard their exposure to schedule delays and cost increases. In the event that force majeure is triggered, a party may want to include a cap for cost overruns or limit relief to scheduling changes. If parties agree to limit relief to a scheduling change, they may need to take into account other deliverables that could have a “waterfall effect” to make certain that all agreements are acting cohesively. Additionally, if a party is not responsible for procuring materials or constructing the project, it must ensure the other party is required to exercise reasonable diligence to avoid, prevent or minimize the impacts to force majeure.
Executed contracts
If a contract has been executed, parties should review the force majeure language to see if and when an event could be triggered. In terms of public health emergencies, some contracts may allow for force majeure to trigger when the project is merely impacted, while others may require a formal declaration from a governmental body. It is important for parties to understand the circumstances under which they can declare a force majeure event, so they can negotiate the best terms possible going forward. Further, parties should review notification processes and deadlines to ensure that they are not missing important milestones that could preclude their ability to claim force majeure. Exercising reasonable diligence and being proactive during these events can help minimize the impacts to your project.
The exact nature and potential risk exposure in the event of coronavirus affecting a party’s ability to perform, and the potential relief and exposure under existing force majeure provisions in the relevant agreements, will vary from agreement to agreement and jurisdiction to jurisdiction. Often, the evaluation of the risk exposure and available remedies will involve a multi-jurisdictional analysis and care should be taken in responding to force majeure claims as the contractual and commercial puzzle may not be straightforward.
Finally, despite the observed disruptions, new contracts are being entered into on a daily basis and careful consideration should be given to the way owners, off takers, constructors, suppliers and other market participants approach the negotiation and drafting of new force majeure provisions in the current environment.