COVID-19 A Force Majeure Event; But Not An Excuse For Breach Of Deadlines Before Pandemic Outbreak : Delhi HC [Read Order]

The Delhi High Court on Friday rejected Halliburton's plea to restrain Vedanta Limited from invoking the bank guarantees on the ground of Force Majeure clause invoked due to the COVID19 pandemic.T

The single bench of Justice Prathiba M Singh was considering an application filed by Halliburton under Section 9 of the Arbitration and Conciliation Act, 1996, seeking to restrain the invocation of bank guarantees.

On prima facie examination of facts, the Court noted that the alleged non-performance of the contract cannot be excused on the ground of force majuere due to COVID-19

HC observations on Force Majeure

The Court observed that COVID-19 is a Force Majeure event, but its application will depend on the facts and circumstances of each case.

"There is no doubt that COVID-19 is a Force Majeure event. But was this event the cause of the non-performance?", the Court asked.

On the issue of application of doctrine of Force Majeure in this matter, the court observed 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.

The court further noted that it would have to assess :

• the conduct of the parties prior to the outbreak,
• the deadlines that were imposed in the contract,
• the steps that were to be taken,
• the various compliances that were required to be made

• Only then it can assess whether, genuinely, a party was prevented or is able to justify its non- performance due to the epidemic/pandemic.

The Court observed :

"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. The Court would have to assess the conduct of the parties prior to the outbreak, the deadlines that were imposed in the contract, the steps that were to be taken, the various compliances that were required to be made and only then assess as to whether, genuinely, a party was prevented or is able to justify its nonperformance due to the epidemic/pandemic".

The court said:

'It is the settled position in 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.'

On prima facie examination of facts, the Court said that force majeure cannot be an excuse for the petitioner.

The Court observed :

"The past non-performance of the Contractor cannot be condoned due to the COVID-19 lockdown in March 2020 in India. The Contractor was in breach since September 2019. Opportunities were given to the Contractor to cure the same repeatedly. Despite the same, the Contractor could not complete the Project. The outbreak of a pandemic cannot be used as an excuse for nonperformance of a contract for which the deadlines were much before the outbreak itself".

The Court also added that the question as to whether the Force Majeure clause itself would apply or justify non-performance in these facts would have to be finally determined finally in the arbitral proceedings.

"Needless to add that the opinion rendered herein is prima facie in nature and shall not bind the arbitral proceedings in any manner whatsoever. The respective claims and counterclaims would be liable to be adjudicated by the duly constituted Arbitral Tribunal, on their own merits, in accordance with law", the bench clarified.

The bench made extensive reference to the SC precedent Energy Watchdog v. Central Electricity Regulatory Commission (2017) 14 SCC 80 and discussed in detail the principles of force majeure.

Background

In 2018, the Petitioner was granted a contract by Vedanta for the integrated development of Mangala, Bhagyam and Aiswarya oil and gas fields in Rajasthan for which the Petitioner had furnished various bank guarantees.

The Petitioner was supposed to complete the contracted project by January 31 2020. However, on Petitioner's own request, the Respondent had extended the deadlines to 29 February 2020 and finally to 31 March 2020.

Amidst the ongoing disagreement between both the parties regarding extension of the deadlines, on 18/03/20, the Petitioner sent a communication to the Respondent, stating that it is invoking the Force Majeure clause due to the ongoing COVID19 pandemic.

In response to that communication, the Respondent, on 31/03/20, informed the Petitioner that it will not be accommodating the request of relief under Force Majeure and reserved its right to take appropriate recourse under the contract.

In response to that communication, the Petitioner moved the Delhi High Court in order to restrain the Defendant from invoking bank guarantees extended by the Petitioner during the signing of the contract.

Subsequently, the Respondent terminated the contract and moved ahead to invoke the concerned bank guarantees. Preempting that, Halliburton moved the HC under Section 9 of the Arbitration Act.

Further Observations

The court noted:

'The Contractor (Halliburton) has clearly defaulted in performance despite repeated opportunities by the Company. The Bank Guarantees are unconditional and irrevocable. All the Bank Guarantees are valid. The language of the financial and performance Bank Guarantees makes it clear that simply on demand, the bank would have to make payment.'

Earlier, the court had passed an ad-interim order in favour of Halliburton, asking both the parties to maintain the status quo.

Observing that the lockdown was prima facie in the nature of a force majeure, Justice C Hari Shankar had passed an ad-interim order on April 20 restraining the invocation of bank guarantees.

But now (on May 29), the bench of Justice Prathiba M Singh vacated the ad-interim order, observing that the same was passed when the complete pleadings of the parties were not on record.

On the issue of invocation of Advanced Bank Guarantees, the court laid down the following process to be followed:

'Accordingly, insofar as the Advance Bank Guarantees are concerned, this Court is of the opinion that the amount recoverable by the Company ought to be ascertained. Accordingly, it is directed that the amount of only the Advance Bank Guarantees which have been invoked, upon being encashed, shall be placed in a separate `Joint Account' which shall be jointly held by the Contractor and the Company. The parties are directed to reconcile the accounts, including payment of any invoices already raised and upon reconciliation as to the unrecovered portion of the advance amount which the Company is entitled to retain, in terms of the clauses in the contract, they may instruct the bank to release the said amounts in favour of the Company.'

The court added:

'The remaining amounts be released to the Contractor. If the parties are unable to reconcile the same, they are free to approach the Arbitral Tribunal under Section 17 of the Act. The `Joint Account' as directed, shall be opened within three days and the amounts of the Advance Bank Guarantees shall be directly deposited in the said account. The reconciliation process shall be completed in two weeks.'

Senior Advocate Gopal Subramanium appeared for Halliburton and Senior Advocate Harish Salve appeared for Vedanta.

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