[Covid-19]: Party in default prior to occurrence of Force Majeure cannot draw any benefit, Delhi HC

The Delhi High Court on May 29, 2020 {M/S HALLIBURTON OFFSHORE SERVICES INC. vs VEDANTA LIMITED & ANR.} held that it is the settled position in law that a Force Majeure clause is to be interpreted narrowly and not broadly. It was held that parties ought to be compelled to adhere to contractual terms and conditions and excusing non-performance would be only in exceptional situations. 

The Single Judge of HC, Justice Prathiba M. Singh, further held 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. It was held that every breach or non-performance cannot be justified or excused merely on the invocation of COVID-19 as a Force Majeure condition. It was held that 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 non-performance due to the epidemic/pandemic. It was further held by the High Court:

"57. The law relating to Force Majeure has been recently settled by the Supreme Court in the case of Energy Watchdog v. Central Electricity Regulatory Commission, (2017) 14 SCC 80. The principles laid down by the Supreme Court in paragraphs 34-42 are as under:

a) Force Majeure would operate as part of a contract as a contingency under section 32 of the Indian Contract Act 1872 (`ICA’). b) Independent of the contract sometimes, the doctrine of frustration could be invoked by a party as per Section 56, ICA. c) The impossibility of performance under Section 56, ICA would include impracticability or uselessness keeping in mind the object of the contract. d) If an untoward event or change of circumstance totally upsets the very foundation upon which the parties entered their agreement it can be said that the promisor finds it impossible to do the act which he had promised to do. e) Express terms of a contract cannot be ignored on a vague plea of equity. f) Risks associated with a contract would have to be borne by the parties. g) Performance is not discharged simply if it becomes onerous between the parties. h) Alteration of circumstances does not lead to frustration of a contract. i) Courts cannot generally absolve performance of a contract either because it has become onerous or due to an unforeseen turn of events. Doctrine of frustration has to be applied narrowly. j) A mere rise in cost or expense does not lead to frustration.k) If there is an alternative mode of performance, the Force Majeure clause will not apply. l) The terms of the contract, its matrix or context, the knowledge, expectation, assumptions and the nature of the supervening events have to be considered. m) If the Contract inherently has risk associated with it, the doctrine of frustration is not to be likely invoked. n) Unless there was a break in identity between the contract as envisioned originally and its performance in the altered circumstances, doctrine of frustration would not apply."

In the present case, Section 9 petition under Arbitration Act was filed by the petitioner (Contractor) seeking injunction against invocation of bank guarantees by the respondent Company. Initially, the interim order was passed in favour of the petitioner. As per the pleadings, the main dispute forming subject matter of Arbitration between the parties is that the Company claims 250 million USD towards Liquidated damages and losses whereas the Contractor claims 91 million USD under various heads.

The HC held that there is nothing on record to show as to what steps the Contractor took toward mitigation, which was necessary as per the Force Majeure clause.

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

Thus, it was held by the HC that the Force Majeure clause does not afford any succour or shelter to the Contractor, at this stage, to seek restraint against encashment of the Bank Guarantees.

In Ansal Engineering Projects Ltd. v. Tehri Hydro Development Corporation Ltd., (1996) 5 SCC 450, the Supreme Court categorically observed that the 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. It was observed that on the basis of the terms of the Bank Guarantee the amount would be payable on a mere demand by the beneficiary.

The HC in present case held that at the time when the ad-interim order was passed by the ld. Single Judge the pleadings between the parties were not complete. It was held that in fact, most of the relevant correspondence was not filed by the Contractor and has now come on record by way of the reply and the rejoinder and further submissions filed by the parties. Thus, it was held that the submission on behalf of the Contractor that the ad-interim order ought to be continued is not tenable. It was held that the said order being ad-interim in nature, was prior to pleadings between the parties and does not deserve to be continued in favour of the Contractor.

Thus, it was concluded by the HC insofar as the invocation of three sets of Bank Guarantees are concerned, no case is made out for passing of any interim order staying the invocation or encashment thereof. The petition was accordingly disposed of by the HC.