Delhi HC - Lockdown not an excuse for breach of deadlines
The on-going Covid-19 pandemic is significantly impacting industries across all sectors around the world. The nation-wide lockdown and restricted travel movements has sent shockwaves across the economy and consequently, the companies are under enormous financial burden coupled with a portending uncertainty, over the performance of their existing contractual obligations. A vital legal issue that has arisen during this unprecedented time is whether the outbreak of COVID-19 and the ensuing lockdown ordered by the Government of India (“Government”) would constitute a “Force-Majeure” event and whether the occurrence of said event can be used as a defence against the non-fulfillment or delay in performing contractual obligation(s).
The Delhi High Court (“DHC”) had recently in Halliburton Offshore Services Inc vs Vedanta Limited & Anr held that not every breach or non-performance of the contract can be justified or excused merely on the invocation of “Force-Majeure” clause in view of lockdown imposed by the Government.
Facts of the case
In this case, the Halliburton Offshore Services Inc (“Petitioner”) and Vedanta Limited & Anr (“Respondent”) entered into a contract on April 25, 2018 (“Contract”) for integrated development of three blocks of oil and gas fields namely Mangala, Bhagyam and Aishwarya (together denoted by the Acronym “MBA”). For entering into the Contract the Petitioner had furnished various bank guarantees in favour of the Respondent. The deadline to complete the contracted project was January 31, 2020 to which parties later agreed to extend the deadline by March 31, 2020 for conclusion of the entire work. Meanwhile, on March 18, 2020 Petitioner invoked the “Force-Majeure” clause and sought further time to complete the project, which was refused by the Respondent vide its email dated 31st March, 2020. Thereafter, on April 7, 2020 Respondent proposed to invoke the termination clause and invocation of bank guarantees.
On April 13, 2020 Petitioner filed a petition under Section 9 of the Arbitration and Conciliation Act, 1996 seeking Injunction against bank guarantees in view of the lockdown imposed by the Government. However, on the same day Respondent terminated the Contract and invoked the bank guarantees.
An ad-interim order was passed by the DHC on April 20, 2020 restraining the Respondent from invocation and encashment of the bank guarantees during the period lockdown remain in force. The DHC vide its order held that lockdown being unpredictable in nature qualify as a “Force-Majeure” event and classified as a distinct ground for seeking Injunction against encashment of bank guarantees. Post the ad-interim order, pleadings were completed and matter was heard by DHC for disposal of the Petition.
The issues that arose before DHC were:
• “Whether COVID-19 can provide succour to a party as in breach of contractual obligations” and;
• “Whether the invocation of Bank Guarantees 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”?
The DHC vacated its earlier stay order on encashment of bank guarantees and held that the order was interim in nature and was to remain effective only till completion of proceedings.
The DHC clarified that no doubt COVID-19 is a “Force-Majeure” event, but whether it would justify for non-performance or breach of contractual obligation(s) must be examined on the facts and circumstances of the case. The DHC held that every non-performance or breach of obligation(s) cannot be excused merely on the invocation of “Force-majeure” clause, in view of COVID-19 and court would have to access various aspects inter-alia the conduct of the parties prior to pandemic, the deadlines that were mentioned in the contract, the steps that were to be taken by the parties and various compliances that were required to be made. It is only then that the court can access whether, genuinely a party is prevented or is able to justify its non-performance due to the outbreak of COVID-19.
The DHC analysed the Supreme Court’s Judgment, Energy Watchdog vs Central Electricity Regulatory and found that it is a settled law that “Force-Majeure” clause is to be interpreted narrowly and not broadly. Parties ought to be compelled to perform their contractual obligation(s) and hence any excuse from its performance would be allowed to parties only in exceptional condition(s). The DHC further held that it is not merely the duty of the court to provide a shelter for justifying non-performance and it is not in the domain of court(s) to absolve parties from performing their contract. Hence, there must be a “real reason” and a “real justification” in order to invoke the “Force-Majeure” clause.
The DHC after considering the pleadings and documents that have been placed on record, held that there have been hardly any work done by the Petitioner since September 2019, long before the outbreak of COVID-19 and hence, there has been non-performance and lack of alacrity in completing the work. Therefore, the past non-performance of the Petitioner cannot be condoned due to lockdown imposed by the Government in India in March, 2020. The Petitioner has defaulted in timely performance despite repeated opportunities given by the Respondent.
The DHC further held that the bank guarantees are valid, and the language of the financial and performance bank guarantees makes it clear that merely on demand, the bank would have to make payment of it.
The DHC court directed that the amount recoverable by the Respondent has to be ascertained and the amount of the advance bank guarantees, upon being encashed, shall be kept in a separate “Joint Account” which shall be held jointly by the Petitioner and the Respondent. Upon reconciliation of the accounts, the unrecovered portion shall be recovered from Petitioner. The DHC also held that the parties are free to reach the arbitral tribunal under Section 17 of the Arbitration and Conciliation Act, 1996 if they are unable to reconcile the account, i.e. arbitral tribunal to take interim measures. It goes without saying that whilst the lockdown imposed by Government considered as an “unforeseeable” event and in some cases classifies as a “Force-Majeure” event. However, this will not be the case for every contract. The same depends upon the number of factors not limited to the phrasing of the clause, conduct of the parties before the outbreak, deadlines of performing obligation(s) etc. Therefore parties cannot take a relief by merely invoking a doctrine of “Force-Majeure in every breach or non-performance of contracts.
This update is by Harshita Sharma, Advocate & Associate at Agarwal Jetley & Co., Advocates & Solicitors. Contact: Email: email@example.com or Mob: (+91) - 99226 28447