On the accrual of penalties in the electricity market during martial law

Since the start of the full-scale Russian military aggression on February 24, 2022, martial law has been imposed across Ukraine. As a result, many businesses have found themselves unable to pay their suppliers on time for goods received or services rendered.

Electricity market participants are no exception. In particular, electricity buyers have failed to make timely payments to their suppliers for electricity supplied or services provided (such as electricity transmission, ancillary services, etc.) under their respective contracts.  

While some buyers withheld payments intentionally, citing force majeure due to the state of war, many others were genuinely unable to pay for objective reasons, such as a lack of funds, temporary suspension of business operations, or staff relocating abroad. This has negatively impacted both the overall business operations of the purchasing companies and their revenue and solvency. 

Due to these non-payments, suppliers have begun initiating legal proceedings to recover the outstanding debts from the buyers.   

It should be noted that, in addition to the principal debt, suppliers have also been imposing penalties for the late payment of goods or services.

 In this article, we will examine the legality of such charges during the period of martial law, taking into account both primary and secondary legislation, as well as the position of the Supreme Court on such disputes.

Regarding the legality of imposing penalties during martial law.

In 2022, the electricity market regulator, the National Energy and Utilities Regulatory Commission (NEURC), adopted Resolution No. 332 dated February 25, 2022, "On Ensuring the Stable Functioning of the Electricity Market, Including the Financial Condition of Electricity Market Participants During the Period of Martial Law in Ukraine."

On April 26, 2022, paragraph 1 of the aforementioned resolution was supplemented with subparagraph 16, which stipulates that for the duration of martial law in Ukraine and for 30 days after its termination or cancellation, the following guidelines shall apply:

16) suspend the accrual and collection of penalties provided for by contracts concluded in accordance with the Law of Ukraine "On the Electricity Market," between electricity market participants.

Therefore, in accordance with the specified sub-clause of the resolution, for the duration of martial law, the supplier is supposedly required to suspend the accrual and collection of penalties from buyers who have failed to pay or have made late payments for electricity already supplied or services rendered.  

It is worth noting that current legislation, in particular the Law of Ukraine "On the National Energy and Utilities Regulatory Commission" and the Law of Ukraine "On the Electricity Market," does not grant the NEURC the authority to interfere in the business activities of electricity market participants or to revoke their rights to accrue penalties as provided for by current laws, which hold higher legal authority, nor to release the Debtor (in this case, the buyer) from the obligation to pay contractual penalties.

We also note that sub-clause 16 of the aforementioned NEURC resolution contains only GUIDELINES for electricity market participants regarding the suspension of penalty accruals; therefore, it is not mandatory for such participants to follow and is temporary in nature.

In turn, the provisions of the Commercial Code of Ukraine define the procedure for applying penalties to business entities in the event of a breach of obligations (Articles 230-232) and are not time-limited.   

Based on these legal provisions, the supplier has an unconditional right to collect penalties from the Debtor (Buyer) for late payment for electricity already supplied or services rendered. 

In other words, on one hand, there is an active resolution from the market Regulator (a subordinate regulatory act) that lacks the authority to interfere in the business activities of commercial entities, in this case, suppliers, On the other hand, there is the Commercial Code of Ukraine, which establishes the supplier's unconditional right to charge penalties on the debt amount for improper performance of obligations, and which holds higher legal authority than the subordinate regulatory act represented by the aforementioned NEURC resolution.

Thus, based on the provisions of the Commercial Code, which takes precedence over the NEURC resolution,

when resolving the issue of charging penalties, electricity market participants must primarily apply the Law rather than the subordinate regulatory act, which is the NEURC resolution.

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However, which legislative acts do the courts apply to these legal relations?

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Are there, after all, legal grounds for exempting the buyer (the Debtor) from paying penalties, taking into account the aforementioned NEURC resolution?    

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It should be noted that when resolving disputes between electricity market participants, courts have concluded that it is the NEURC resolutions that should be applied, considering that the provisions of the relevant NEURC resolution are specific to the legal relations established between electricity market participants.

For instance, one example of such a court decision is the resolution of the Supreme Court, composed of a panel of judges of the Commercial Cassation Court, dated July 18, 2023, in case No. 910/9798/22, in which the court reached the following conclusion:

«16. The court of first instance did not take into account the defendant's reference to the suspension of the accrual of 3% per annum and "inflationary losses" based on NEURC Resolution No. 332 of February 25, 2022, given that, according to the said resolution, the suspension of accrual and collection applies specifically to penalties; however, 3% per annum and "inflation" are not penalties, but rather components of the debt. Therefore, the amount of inflationary losses and interest provided for by Part 2 of Article 625 of the Civil Code of Ukraine cannot be reduced.

18. The NEURC adopted the resolution "On Ensuring the Stable Functioning of the Electricity Market, Including the Financial Condition of Electricity Market Participants During the Period of Martial Law in Ukraine" No. 332 dated February 25, 2022.

On April 26, 2022, this NEURC resolution was supplemented with Clause 16, which provides for the suspension of the accrual and collection of penalties stipulated by contracts concluded in accordance with the Law of Ukraine "On the Electricity Market" between electricity market participants for the period of martial law.

Therefore, since the disputed business legal relations were formed in accordance with the Law of Ukraine "On the Electricity Market," the specified NEURC resolution is applicable to them.

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The period for which the plaintiff claimed the penalty falls within the period of martial law.

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Consequently, in view of the above circumstances, the plaintiff's calculation of the penalty for the period from 26.07.2022 to 01.11.2022 is unfounded." https://reyestr.court.gov.ua/Review/112286895.

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The Supreme Court, sitting as a panel of judges of the Commercial Cassation Court, reached the same conclusion regarding the application of the specified NEURC resolution and the suspension of the accrual of penalties in the electricity market in its ruling of 26.07.2023 in case No. 922/1948/22, https://reyestr.court.gov.ua/Review/112545752.

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"4.23. According to Part 1 of Article 3 of this Law, the Regulator exercises state regulation with the aim of achieving a balance of interests between consumers, business entities operating in the energy and utility sectors, and the state, as well as ensuring energy security and the European integration of Ukraine's electricity and natural gas markets.

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4.24. In accordance with Clause 4 of Part 3 of Article 6 of the Law of Ukraine "On the Electricity Market," the Regulator's powers in the electricity market include, in particular, the approval of market rules, day-ahead and intraday market rules, the transmission system code, distribution system codes, the commercial metering code, retail market rules, the procedure for allocating cross-border capacity (including provisions on the specifics of allocating cross-border capacity with third countries), and other regulatory legal acts and normative documents governing the functioning of the electricity market.

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4.25.Thus, the NEURC (the Regulator) adopted Resolution No. 332 dated 25.02.2022 (as amended on 26.04.2022) within the scope of its authority. Therefore, it must be applied, including Subclause 16 of Clause 1, according to which the accrual and collection of penalties provided for by contracts concluded in accordance with the Law of Ukraine "On the Electricity Market" between electricity market participants are suspended."

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It should also be noted that case No. 911/1359/22 is currently pending before the Joint Chamber of the Commercial Cassation Court of the Supreme Court. This case concerns the recovery of penalties by a supplier for late performance of obligations and will provide a final ruling on the legality of applying or not applying NEURC Resolution No. 332 dated February 25, 2022, regarding the suspension of penalty accruals during martial law.  

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In summary, as of today:

- NEURC Resolution No. 332 of February 25, 2022, rather than legislative acts of higher legal force, applies to the suspension of penalty accruals. Consequently, electricity market participants cannot accrue penalties;

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- penalties for the late performance of obligations under contracts concluded in accordance with the Law of Ukraine "On the Electricity Market" may not be recovered from electricity market participants. 

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The legal consulting firm FEDOTOV&PARTNERS specializes in providing services to participants in the electricity and natural gas markets. Our experience in supporting energy companies allows us to say that we not only know what is written in energy laws, but we also understand how the energy business works in practice. If you have any legal questions, we are always ready to help and offer you the most optimal solutions to your problems.

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