Force Majeure Verdict: Delhi High Court

Halliburton Offshore Services Inc. V. Vedanta Ltd, 2020 SCC Online Del 542

Petitioner’s Counsel: Senior Advocate Sandeep Sethi with Advocate Piyush Sharma & AdvocateDhritiman Bhattacharyya.

Respondent’s Counsel: Senior Advocate Abhishek Manu Singhvi with Advocates Anuradha Dutt, Anish Kapur, Kunal Dutt.

Order Passed on: 20.04.2020 Bench: Justice C Hari Shankar

INTRODUCTION:

The global COVID-19 outbreak has led to the disruption of all industries and has put the almost complete population of the world under lockdown. This prevents the efficient working of businesses and has impacted existing operations and contracts. On the issue of contracts, this outbreak has brought many new aspects to the fore, one of which includes the Force Majeure clause that impacts formal contracts. Given the disruption of supply chains caused by the COVID-19 pandemic, many contracts will be delayed, interrupted, or even cancelled. One of its impacts can be seen from the order passed by Delhi High Court in the case of Halliburton Offshore Services Inc. v. Vedanta Ltd.(2020 SCC Online Del 542).

In this case, the court held that Prima facie holding that the COVID-19 lockdown is in the nature of force majeure, the Delhi High Court has restrained Vedanta Ltd from invoking eight bank guarantees extended by Halliburton Offshore Services in connection with a development contract for certain blocks in Rajasthan. 

KEY ISSUES:

Force Majeure:

As per the Manual for Procurement of Goods 2017, a Force Majeure (FM) means extraordinary events or circumstances beyond human control such as an event described as an act of God (like a natural calamity) or events such as war, strikes, riots, crimes (but not including negligence or wrong-doing, predictable/seasonal rain and any other events specifically excluded in the clause). 

An FM clause in the contract frees both parties from contractual liability or obligation when prevented by such events from fulfilling their obligations under the contract. This clause does not excuse a party’s non-performance entirely, but only suspends it for the duration of the FM. The firm has to give notice of FM as soon as it occurs and it cannot be claimed ex-post facto. 

This brief introduction leaves us with a question that ‘Can Force Majeure be invoked in Indian Contracts with the rise of Covid-19?’ 

The Ministry of Finance notification dated 19th Feb 2020, addresses this doubt and clarifies that the disruption of supply chains due to the spread of coronavirus should be considered as a case of natural calamity and Force Majeure clause may be invoked, wherever considered appropriate, following due procedures.

Many contracts may not contain the Force Majeure clause explicitly to define clear execution/procedures to be conducted to claim benefits under the clause due to the COVID-19 outbreak. A party can be excused from a contract on account of COVID-19 being declared a pandemic is a fact-specific determination that will depend on the nature of the party’s obligations and the specific terms of the contract.  If the contract does not include a Force Majeure clause, the affected party could claim relief under the ‘Doctrine of Frustration’ under Section 56 of the Indian Contract Act, 1872.

Ad Interim Injunction: 

Ad Interim stay means the temporary order of injunction passed by the court while the suit is still pending. It is granted when the applicant established that there would be irreparable damage without it or as per the Court require.

KEY FACTS AND ARGUMENTS:

Petitioner:

  • Pursuant to a tender floated by Vedanta, the Petitioner and the Respondent had entered into a contract for integrated development of certain blocks (Mangala, Bhagyam and Aishwarya) in Rajasthan.
  • In terms of this contract, various Performance, Liquidated Damages and Advance bank guarantees were furnished by Halliburton.
  • The deal between Vedanta and Halliburton was with regards to the development contract of certain oil blocks in Rajasthan 
  • As interim protection, the Halliburton had prayed for an injunction against Vedanta, restraining it from invoking or encashing eight bank guarantees issued by the ICICI Bank in favour of the Vedanta.
  • In terms of this contract, various Performance, Liquidated Damages and Advance bank guarantees were furnished by Halliburton.
  • The Petitioner argued that it had an extended deadline until March 31, 2020, to complete the project.
  • the petitioners emphasized that Vedanta had initially granted an extension of time, to complete the project till 31st March 2020. He further submitted that a substantial part of the project was completed prior to the said date. However, due to the complete nationwide lockdown on industrial activities as well as on movement of persons in the country consequent to the n-COVID-2019 pandemic, the petitioner was unavoidably handicapped in performing the contract.
  • Consequently, the Halliburton was constrained to move the High Court for appropriate reliefs.

Respondent:

  • Vedanta argued that the only ground on which invocation of a bank guarantee could stay was the existence of egregious fraud which did not exist in the present case.
  • He submitted that the contract for the three projects was to be completed on the 16th January 2019, 16th March 2019 and 16th June 2019 respectively. He further argued that the Petitioner had raised the issue of force majeure, for the first time, in its communication dated 25th March 2020 which according to him was, merely taking advantage of the nCOVID-2019 crisis that had befallen the country, and to reap benefits therefrom.

ANALYSIS OF THE ORDER:

The order was passed by a Single Judge Bench of Justice C Hari Shankar in a petition preferred by Halliburton Offshore Services (Petitioner) against Vedanta Ltd (Respondent) under Section 9 of the Arbitration and Conciliation Act, 1996.

  • The court opined that prima facie, judicial interference with invocation or encashment of bank guarantees was permissible only in cases of egregious fraud was not acceptable.

The court observed: “Besides, while egregious fraud is well-encapsulated as one of the two grounds on which invocation of an unconditional Bank guarantee may be injuncted, the contours of the second ground, of irretrievable or irreparable injury, are, in my opinion, somewhat more elastic.”

  • The Court asserted that for grant of interim relief, all that was required to be seen was whether “special equities” could be said to exist.

The threshold for special equities was further analysed by a 2007 decision of the Supreme Court in Himadri Chemicals Industries Ltd. case which allowed the Supreme Court to once again lay down principles that would govern judicial intervention in granting injunctions for invoking unconditional bank guarantees. The Court laid down six principles for justifying judicial intervention and the most pertinent of which is:

“…(vi) Allowing encashment of an unconditional bank guarantee or a letter of credit would result in irretrievable harm or injustice to one of the parties concerned.”

  • The Court said “Such a lockdown is unprecedented, and was incapable of having been predicted either by the respondent or by the petitioner. Mr Sethi has submitted, categorically, that, till the date of clamping of the lockdown, on 22nd March 2020, his client was in the process of proceeding with the project, and that had the lockdown not be imposed, the project might have been completed by 31st March 2020.
  • Prima facie, in my view, special equities do exist, as would justify the grant of the prayer, of the petitioner, to injunct the respondent from invoking the bank guarantees of the petitioner, forming the subject matter of these proceedings, till the expiry of a period of one week from 3rd May 2020, till which date the lockdown has been imposed.”
  • The Delhi High Court thus granted the Interim Protection and thereby restrained Vedanta from invoking the guarantees till the next date of hearing.

CONCLUSION:

Prima facie holding that the COVID-19 lockdown is in the nature of force majeure, the Delhi High Court has restrained Vedanta Ltd from invoking eight bank guarantees extended by Halliburton Offshore Services in connection with a development contract for certain blocks in Rajasthan. Therefore, the interim order of the Court in Halliburton Offshore Services Inc. is open to scrutiny and challenge as its reasoning stems from an unordinary reading of the Supreme Court’s jurisprudence with specific reference to the decision of Standard Chartered Bank Ltd. The Court’s order may spark ambiguity with respect to special equities as a ground to intervene and restrain an invocation of an unconditional bank guarantee.

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