Facts of the case:

Vedanta had floated an international tender for development of three oil blocks. Halliburton accepted the offer, and accordingly both the companies executed a contract dated 25.04.2018 for integrated development of the aforesaid oil blocks.

 

As per the agreement, Vedanta extended an advance which could be offset by Halliburton against future receivables. The agreement stipulated that Halliburton must adhere to the timelines failing which Vedanta could invoke three kind of bank guarantees: financial guarantees, meant for securing liquidated damages; advanced guarantees, to secure advances paid by Vedanta; and performance guarantee to ensure efficient performance of the contract.

 

Vedanta had initially granted extension of time to complete the project till 31.03.2020. Substantial part of the project was completed prior to the said date. Halliburton was unable to complete the development of oil blocks citing that the lockdown had rendered the performance of its contract with Vedanta temporarily impossible. Halliburton approached the High Court under section 9 of the Arbitration and Conciliation Act, seeking interim relief by way of a restraint against Vedanta from encashing 8 bank guarantees. The bank guarantees were issued in favour of Vedanta to secure the performance of obligations under the contract. After the filing of petition by Halliburton, Vedanta terminated the contract, and communicated to the bank for invocation of the 8 bank guarantees forming subject matter of the proceedings.

Interim relief granted by the Delhi High Court:

The Court observed that the special equities demanded that the bank guarantee should not be encashed thereby granting limited protection to Halliburton. While doing so the court stressed that complicated questions on force majeure were involved and hence temporary stay was granted till next date of hearing.

 

Issue before Delhi High Court:

1.    Whether delay in performance of contract by Halliburton can be excused due to Covid-19 Lock Down in March 2020?

 

2. Whether Vedanta can be injuncted from invoking Bank Guarantee on the ground of occurrence of a “force majeure event”?

 

Halliburton’s contentions:

It sought extension of interim stay on Vedanta from invoking bank guarantees citing:

1. The contract stood terminated and the arbitration clause was invoked by parties for which proceedings are pending.

2.    Waiver from payment of liquidated damages sought due to defaults of Vedanta.

3. Substantial part of the project stood completed and only 2-3% of the total work is pending.

4.    The Halliburton personnel are unable to travel from various foreign countries for installation of different kind of equipment due to Covid-19 induced lockdown.

5.    On 06^th May 2020, final proposal was offered by Vedanta seeking timelines for execution, which indicated that contract was still alive and Halliburton wanted to resolve the matter.

6.    Vedanta had an option to extend the term of the contract for a further period up to one year, accordingly they agreed to extend the contract initially till 31^st March 2020 and thereafter till 30^th June 2020.

7. Halliburton had been giving continuous progress report carried out in fields.

8. Bank Guarantee not to be encashed till liquidated damages are determined by the parties as per the clause of the contract which provided that maximum 10% of the call out value can be charged towards liquidated damages.

 Vedanta’s contentions:

Vedanta opposed the extension of stay on the following grounds:

1.      Bank guarantees are independent contracts and not dependent on the agreement between the parties and not connected with any dispute in connection with underlying contract.

2.      Bank guarantee was issued in terms of the contract to secure the advance payments and for effective performance of the contract.

3.      Vedanta is entitled to levy liquidated damages of 1.25% per month or on pro-rata basis up to maximum 10% of call out value.

4.      Halliburton on its own agreed to complete the work on the various fields by the deadlines suggested by themselves, which was not agreeable to Vedanta.

5.      Halliburton was in breach of the agreed terms of the contract prior to the outbreak of COVID-19 and thus not entitled to invoke the force majeure clause.

6.      Egregious fraud is required to be established in the underlying contract and not in the encashment of the Bank guarantee, since neither the contract is challenged in the present case nor the termination.

7.      Relying upon the various judgments of the Apex Court, Vedanta stated that an injunction against the invocation of bank guarantees can be issued only in the extreme situations, which is not the case in the present dispute.

Key Principles:

1.  Force Majeure clause is to be interpreted narrowly and not broadly.

2.  Courts will be slow in allowing any party to violate its obligations as per contract.

3.  Non-performance would be allowed if the subject matter of contract is totally frustrated.

4.  Every breach or non-performance cannot be justified or excused merely on the invocation of COVID-19 as a force majeure condition.

5.  Temporary inconvenience will not absolve a party from its obligations.

6.  Outbreak of a pandemic cannot be used as an excuse for non-performance of a contract for which deadlines were much before the outbreak.

Verdict of Delhi High Court;

The High Court vacated the stay on invocation of bank guarantees. It observed that:

 

(i)   There was only miniscule work carried out in the months of September-October 2019 and no work was done in November 2019. As per report of 6^th January 2020, no work carried out in all three fields during the months of November- December 2019.

 

(ii)  As per the report of 11^th March 2020, miniscule of work carried out in November- December 2019 and absence in January- February 2020. So delay not due to Covid lockdown.

 

(iii) Halliburton defaulted in performance despite repeated opportunities by Vedanta. Halliburton invoked the Force Majeure clause as a last resort, since the work had stopped long before the lockdown.

 

(iv)Reliance placed on the principles laid down in the case of Energy Watchdog vs. Central Electricity Regulatory Commission[1], to hold that contractor was in breach since September 2019 and thus outbreak of pandemic cannot be used as an excuse for non-performance of contract.

 

(v)   Reliance placed on the case of Global Steel Philippines vs. STC of India Ltd. ILR 2009 VI Delhi 1, to hold that force majeure clause cannot afford any shelter to Halliburton at this stage, to seek restraint against encashment of the Bank Guarantees.

 

(vi)Reliance was placed on the principles laid down in the case of Standard Chartered vs. Heavy Engineering Corporation Ltd & Ors[2], to hold that so long as the invocation is in the terms of the bank guarantee courts cannot injunct invoking the bank guarantee.

 

(vii)  Reliance placed in the case of Ansal Engineering Projects Ltd. v. Tehri Hydro Development Corporation Ltd[3] to hold that adjudication of the quantum of loss and damages is not a precondition for invoking Bank Guarantees which are meant to secure the loss or damage caused due to breach.

Acelegal Analysis:

This is a decision in the series of decision which have recently been rendered while interpreting provisions of section 32 and section 56 of the Indian Contract Act in the Covid-19 situation. This decision too walks the same road as all earlier decision.

The courts recognise that the lockdowns are temporary phenomenon and hence these are not changing the essential characteristics to the extent that it leads to frustration of contract.

The sanctity of a contract is upheld by the courts and that is also the right way to lead in these times. The reciprocal promises in a contract are sacrosanct and should not be easily alterable at least not if they cause temporary inconvenience.

Recently, the Mumbai High Court in the case of Standard Chartered (supra) also did not allow the injunction against the bank guarantee on the same premise.

This decision also introduces the element of conduct of the party seeking force majeure. The Court is mindful of the fact that the party is already a defaulter when it knocks on the courts door. Therefore,  the lock down due to Covid-19 cannot be used a subterfuge to wriggle out of the contractual terms.