DECONSTRUCTING DELHI HIGH COURT’S ORDER AFFIRMING THE NATIONWIDE LOCKDOWN AS FORCE MAJEURE

The Hon’ble High Court of Delhi, today, granted ad interim injunction and stay on the invocation of unconditional Bank Guarantees by Vedanta Limited, on the ground that the lockdown due to n-Covid-2019 pandemic was a condition of force majeure and the court had the power to injunct invocation of bank guarantees when there is a prima facie case of special equities in the form of preventing irretrievable injustice between the parties.

The said order dated 20th April 2020 was passed in O.M.P. (I) (COMM) 88/2020 titled Halliburton Offshore Services Inc. v Vedanta Limited and Anr.

BACKGROUND

The petition in question was filed by Halliburton Offshore Services Inc. (“Halliburton”) in terms of Section 9 of the Arbitration and Conciliation Act, 1996, praying for interim protection by restraining Vedanta Limited (“Vedanta”) from invoking eight bank guarantees, five of which were scheduled to expire on 30th June, 2020, while the remaining three on 24th November, 2020.

The eight bank guarantees in issue, were furnished by Halliburton in favour of Vedanta pursuant to a contract dated 25th April, 2018 (“Contract”), executed between Halliburton and Vedanta for development of three oil field blocks in Rajasthan.

Several disputes had arisen between the parties that were prima facie found to be arbitrable. While communicating its intention to invoke arbitration, Halliburton stated that it had apprehensions regarding Vedanta’s intentions to terminate the Contract on the ground that Halliburton had failed to complete the proposed development in terms of the Contract before the expiry of the extended completion date i.e. 31st March 2020.

Consequentially, Halliburton also apprehended the unlawful invocation of its bank guarantees and had accordingly approached the Hon’ble High Court of Delhi for Interim Relief.

HALLIBURTON’S ARGUMENTS

Halliburton made the following submissions in support of its prayer for grant of interim relief:

a. A substantial part of the project had been completed prior to 22nd March 2020, however owing to a complete lockdown, on industrial activities as well as on movement of persons in the country, including, specifically, the state of Rajasthan – consequent to the n-COVID-2019 pandemic, – Halliburton was unavoidably handicapped in performing the contract.

b. Halliburton had addressed several communications to Vedanta invoking the force majeure clause in terms of the Contract seeking the benefit thereof. However, Vedanta refused to accommodate Halliburton and instead reserved its right to take appropriate recourse in terms of the Contract, “including, but not limited to termination of subject contract and getting the balance activities completed through alternative resources at the risk and cost of” the petitioner.”

VEDANTA’S ARGUMENTS

Vedanta’s primary argument in defence was that “in law, the only ground on which invocation of a bank guarantee can be stayed, is the existence of egregious fraud”.

Vedanta also made the following submissions in support of its defence:

a. Halliburton had made a baseless allegation of fraud against Vedanta but had failed to substantiate the same;

b. The Contract envisaged work, to be carried out, by Halliburton, in three wells, to be completed on the 16th January, 2019, 16th March, 2019 and 16th June, 2019 respectively and the delay in completion of worked thereafter had not been condoned by his client, either expressly or impliedly and a large part of the communications between the parties had been concealed by Halliburton

c. Halliburton was merely seeking to piggyback on the n-COVID-2019 crisis that had befallen the country and such actions on part of Halliburton were clearly an after-thought.

d. The project, which had been assigned to Halliburton, stood specifically exempted from the lockdown, as imposed by the Government, vide Circular dated 26th March, 2020, of the Government of India, a fact that Halliburton had concealed in its Petition.

HALLIBURTON’S REJOINDER

Halliburton submitted the following in rejoinder:

a. Egregious fraud was not the sole ground for grant of stay on invocation of a bank guarantee and a second circumstance, namely the existence of special equities had also been carved out as an exception to the same.

b. Halliburton was not aware of any exemption to the Project during the lockdown in as much as it was concerned with drilling the oil field as against producing oil that had been exempted by the Government.

c. Only 2.1% of the work relating to the Mangla field, 5.5% of the work relating to the Bhagyam field and 2.4% of the work relating to the Aishwariya field, remained, which could easily have been completed before 31st March, 2020, had the restrictions clamped by the lockdown not intervened.

d. Halliburton also denied allegations of concealment.

OBSERVATIONS OF THE COURT

Briefly stated, the Hon’ble High Court of Delhi, held that judicial interference with invocation, or encashment, of bank guarantees, where they are unconditional, is permissible if there is a prima facie case of special equities in the form of preventing irretrievable injustice between the parties.”

While recording that the present state of lockdown permitted the Court to direct injunction on the invocation of the Bank Guarantees in Question, the Hon’ble Court observed viz. “The countrywide lockdown, which came into place on 24th March, 2020 was, in my opinion, prima facie in the nature of force majeure. 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 grant of the prayer, of the petitioner, to injunct the respondent from invoking the bank guarantees of the petitioner, forming 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 Court relied on the following decisions in support of its observation that judicial interference with invocation of bank guarantees, is permissible if there is a prima facie case of special equities in the form of preventing irretrievable injustice between the parties.”

a. U. P. Cooperative Federation Ltd v. Singh Consultants and Engineers (P) Ltd [(1988) 1 SCC 174]

b. Svenska Handelsbanken v. Indian Charge Chrome [(1994) 1 SCC 502]

c. Itek Corporation v. First National Bank of Boston [566 Fed Supp 1210]

d. U. P. State Sugar Corporation v. Sumac International Ltd [(1997) 1 SCC 568]

e. Mahatma Gandhi Sahakara Sakkare Karkhane v. National Heavy Engineering Coop. Ltd [(2007) 6 SCC 470]

In view of the above the court allowed stay on invocation of the bank guarantees till the expiry of exactly one week from 3rd May, 2020, till which date the lockdown stands presently extended.

The Court also stated that “whether this interim injunction merits continuance, thereafter, or not, would be examined on the next date of hearing, consequent to pleadings being completed and all requisite material, including all relevant Governmental instructions, being placed on record.”

CONCLUSION

The above decision of the Hon’ble High Court of Delhi will open floodgates for all contractual parties to re-negotiate several aspects of their contracts including date of completion of contractual obligations and date of payments, in view of the lockdown being declared a force majeure situation. The decision will also be a relief to all parties fearing termination of their respective contracts during the lockdown period or anticipating invocation of bank guarantees.

The positive repercussions of this decision may be far reaching if used by a party in similar facts and circumstances.