published by LiveLaw on 04 June 2020 [https://www.livelaw.in/columns/ad-interim-to-interim-stage-delhi-hc-takes-a-u-turn-to-vacate-stay-against-bg-invocation-157817]
By Rohan Batra & Dhruv Sethi
On May 29, Delhi High Court vacated its earlier stay order on BG encashment and held that COVID – 19, a force majeure event, does not excuse contractor’s non-performance of a contract “for which the deadlines were much before the outbreak itself”.
Factual Matrix
Selected in a competitive bidding process, Halliburton Offshore Services Inc. (“Contractor”/ “Halliburton”) executed contract dated April 25, 2018 with Vedanta Limited (“Company”) for fast track development of oil well construction and enhancing recovery of oil from three fields- Mangala, Bhagyam and Aishwarya (“Contract”).
Few days ahead of the lockdown, Halliburton invoked the Force Majeure clause on March 18, 2020 and sought extra time to complete the project. However, the Company refused. It instead proposed termination and threatened invocation of bank guarantees (“BGs”)
At this point i.e. April 13, 2020 Haliburton filed a petition under Section 9 of the Arbitration and Conciliation Act, 1996 (“Act”), inter alia, seeking injunction against invocation of BGs (“Petition”). On the same day, the Company terminated the Contract and invoked the BGs.
By order dated April 20, 2020, the Single Judge of the Delhi High Court (“Court”) passed an ad interim order restraining the Company from invoking the BGs. In the detailed order passed, the Court had observed that lockdown was a force majeure event and special equities, a distinct ground for seeking injunction against encashment of bank guarantees, did exist justifying the ad-interim restraining order (“Ad-Interim Order”).
Post the Ad-Interim Order, pleadings were completed and matter was heard for disposal of the Petition.
Issues
Two questions were posed for consideration:
- Whether COVID-19 can provide succor to a party in breach of contractual obligations?; and
- Whether the invocation of BGs is liable to be injuncted on the ground of occurrence of a force majeure event i.e. COVID-19, if the breach occurred prior to the said outbreak?
Key findings
After examining the pleadings and the factual backdrop, the Court held that “…Force Majeure clause in the contract covers epidemics and pandemics…” and that “…There is no doubt that COVID-19 is a Force Majeure event. But was this event the cause of non-performance?” (emphasis originally present)
In a later observation, the Court observed that whether COVID-19 would justify non-performance or breach of contractual obligations must be examined on the facts and circumstances of each case. It then proceeded to hold that:
- Not every breach or non-performance can be justified or excused merely on the invocation of COVID-19 as Force Majeure; and
- In order to assess as to whether, genuinely, a party is able to justify its non-performance due to a pandemic/ epidemic, the Court has to analyze the following:
- the conduct of the parties prior to the outbreak of the pandemic;
- the deadlines that were imposed in the contract;
- the steps that were to be taken by the parties; and
- the various compliances that were required to be made.
Reiterating the settled position, the Court held that Force Majeure clause of a contract is to be interpreted “narrowly and not broadly”. The Court observed that parties must adhere to the terms and conditions of the contract and excusing non-performance is solely in exceptional circumstances.
Adverting to the Supreme Court dicta in Energy Watchdog v. CERC, (2017) 14 SCC 80 and summarizing the principles laid therein, the Court held that it is not in its domain to absolve parties from performing their part of the contract. It is also not the duty of the courts to provide shelter for justifying non-performance of a party- the Court ruled. Concluding this point, it held that “There must be a ‘real reason’ and a ‘real justification’ which the Court would consider in order to invoke a Force Majeure clause.”
Upon perusing the pleadings and documents placed on record, the Court held that the Contractor was in breach of the deadline for the completion of work stipulated in the Contract since September 2019 i.e., long before the outbreak of COVID -19 or the commencement of lockdown. Despite the extension of the deadlines, the Contractor failed to complete the Contract. Thus, the Court held that the past non-performance of the Contractor cannot be condoned due to the COVID-19 lockdown.
Conclusion
Answering the first issue, the Court held that Force Majeure clause does not afford any “succor” or “shelter” to the Contractor, at this stage, to seek restraint against BG encashment.
Apropos the second issue, the Court noted that BGs are unconditional, irrevocable and valid. It further recorded that language of financial and performance BGs (besides advance BGs) show that they are payable on demand. In light of the facts subsequently coming to the fore from the pleadings filed post the Ad-Interim Order, the Court found no reason to continue the said order and stay the invocation of the BGs.
Re advance BGs, the Court conditioned the encashment to reconciliation of accounts to ascertain the unrecovered component of the advance and till then, to place the amount in a ‘Joint Account’. Liberty was given to approach the arbitral tribunal under Section 17 of the Act, if they failed to reconcile.
Subject to the foregoing modification, the Ad Interim Order stood vacated, lifting the stay on BG encashment, with the standard caveat that the opinion rendered by Court is prima facie.
Petition and pending applications were disposed of.
