Lex Knowledge (May 2021)

3rd May 2020

Every breach or non-performance cannot be justified or excused merely on the invocation of COVID-19 as a Force Majeure condition – Invocation of bank guarantee allowed by Delhi High Court.

(a) Background:

Vide order dated 29th May, 2020 the Delhi High Court, in the case of M/s. Halliburton Offshore Services Inc. vs. Vedanta Limited & Anr. [O.M.P (I) (COMM.) No. 88/2020 & I.As. 3696-3697/2020], held that non-performance or breach of a contract has to be examined on the facts and circumstances of each case. Every breach or non-performance cannot be justified or excused merely on the invocation of COVID-19 as a Force Majeure condition. The Court, which had initially granted interim relief by its order dated 20th April, 2020, restraining Vedanta Limited (respondent) from invoking/encashing three Bank guarantees against Hilbutron Offshore Services Inc. (petitioner), vacated the interim order by its order dated 29th May, 2020.

(b) Brief facts of the case:

A Production Sharing Agreement (“Agreement”) was entered into between the parties wherein it was stipulated that the petitioner, M/s. Halliburton Offshore Services Inc., would carry Project of end-to-end integrated Oil Well Construction, development of surface facilities and application of Enhanced Oil Recovery Technologies for enhancing the ultimate recovery from three oil fields.

The Agreement also provided a commencement date and a completion date of the project. Vedanta Ltd. repeatedly insisted that work on all the projects ought to stand concluded by 31st January 2020. The Court was of the view that finally, however, as per the agreement between parties, the deadline for conclusion of the entire work was agreed as 31st March 2020.

The petitioner failed to fulfil the Agreement within the stipulated time and on 18th March, 2020, it invoked the Force Majeure clause of the Agreement and sought further time to complete the project. The same was, however, not acceptable to the respondent, and on 31st March, 2020 and again on 7th April, 2020 the petitioner invoked a clause of the Agreement proposing termination of the Agreement and threatened consequential action including the invocation of the Bank Guarantees.

(c) Arguments on behalf of the Petitioner:

In relation to the invocation of Bank Guarantees, it was, inter alia, argued by the petitioner that a substantial part of the Project stands executed for which the petitioner is to be paid a large amount and only 3-5% of the Project work remained outstanding. Accordingly, the petitioner argued that there were no justified reasons for invoking the Bank Guarantees. The petitioner took resort to the Force Majeure clause in the contract to assert that events or situations which are beyond the reasonable control of a party would include an epidemic in the nature of COVID- 19.

Accordingly, the petitioner argued that the Force Majeure squarely applied in view of the outbreak of COVID-19 globally and that it was well within the knowledge of the respondent Company that the kind of equipment that was to be installed required personnel to travel from various foreign countries which was not possible due to the lockdown imposed in the country. The petitioner also stated that the issuance of the letter dated 18th March, 2020 clearly established their bonafides, as they had notified the respondent Company well in advance of the difficulties it was facing and the impact of the Force Majeure event as per clause 15.4 of the contract. In view of the submissions, the petitioner, inter alia, prayed for an injunction of the invocation of the bank guarantees.

(d) Arguments on behalf of the Respondent:

It was, inter alia, argued by the respondent that the law relating to bank guarantees is very well settled. They argued the bank guarantees are independent contracts which are not subservient to the main contract and the standard that would be applied in such cases is whether the invocation is liable to have stayed on the ground of egregious fraud or special equities. They further argued that a perusal of the Bank Guarantees in this case showed that the terms of invocation are completely unconditional and they are not connected in any manner with any dispute in respect of the underlying contract. The respondent opposed injunction against invocation of Bank Guarantees on the ground that the petitioner did not make out a case of egregious fraud or irretrievable injustice.

The respondent showed that the petitioner was behind schedule and was accordingly in breach of the contract even prior to the outbreak of COVID-19. Accordingly, the respondent’s case was that the petitioner could not take shelter of COVID-19 as a Force Majeure clause to cover up breach of contractual obligations. The respondent submitted that there was a difference between impossibility of performance and a Force Majeure clause. Factum of lockdown was not disputed by them, however, since the Project was delayed prior to the outbreak of the epidemic, the respondent argued that the petitioner was not entitled to seek shelter under the Force Majeure clause.

It was also argued by the respondent that the question whether the Force Majeure is rightly invoked or not is itself a contractual dispute, which was beyond the scope of a Section 9 petition under the Arbitration and Conciliation Act

(e) Judgment:

The Delhi High Court held that the question as to whether COVID-19 would justify non-performance or breach of a contract has to be examined on the facts and circumstances of each case. Every breach or non-performance cannot be justified or excused merely on the invocation of COVID-19 as a Force Majeure condition.

To assess as to whether, genuinely, a party was prevented or is able to justify its non-performance due to the epidemic/pandemic, the Court would have to consider the following aspects:-

  1. the conduct of the parties prior to the outbreak;
  2. the deadlines that were imposed in the contract;
  3. the steps that were to be taken; and
  4. the various compliances that were required to be made

The Court examined the facts and circumstances of the case and on examination of the monthly reports, was of the view that the petitioner had done miniscule work in the months preceding the outbreak of COVID-19.

It is important to note that the Court was of the view that COVID-19 was indeed a Force Majeure event but went on to hold that in the facts and circumstances of the present case, the non- performance by the petitioner could not be attributed to it –

“56. …There is no doubt that COVID-19 is a Force Majeure event. But was this event the cause of the non -performance?”

The Delhi Court further held that it was a settled position of law that a Force Majeure clause is to be interpreted narrowly and not broadly. Parties ought to be compelled to adhere to contractual terms and conditions and excusing non-performance would be only in exceptional situations. The High Court relied on the case of Energy Watchdog vs. Central Electricity Regulatory Commission (2017) 14 SCC 80 and stated that it is not in the domain of Courts to absolve parties from performing their part of the contract. It is also not the duty of Courts to provide a shelter for justifying non-performance. There has to be a ‘real reason’ and a ‘real justification’ which the Court would consider in order to invoke a Force Majeure clause.

Thus, the Court held that the petitioner was in breach since September 2019 and the outbreak of the pandemic cannot be used as an excuse by him for non-performance of the contract for which the deadlines were much before the outbreak itself. The Court held that the whether Force Majeure clause itself would apply or justify non-performance would have to be decided in arbitration proceedings. However, the Court refused to grant relief to the petitioner from encashment of Bank Guarantees on account of Force Majeure event. Accordingly, the Delhi High Court vacated the interim stay granted on invocation of Bank Guarantees by order of the Court dated 20th April, 2020 and allowed its encashment.

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