The Delhi High Court (“DHC”) has, in the case of M/s. Halliburton Offshore Services Incorporated v. Vedanta Limited and Others (decided on April 20, 2020) temporarily injuncted Vedanta Limited (“Vedanta”) from encashing bank guarantees issued on behalf of Halliburton Offshore Services (“Halliburton”) as the lockdown due to Covid-19 would prima facie amount to force majeure.

Facts

Vedanta and Halliburton entered into an agreement dated April 25, 2018 for the integrated development of three blocks to drill petroleum wells. In terms of the said contract, various performance, liquidated damages and advance bank guarantees were furnished by Halliburton. The above order was filed in an application filed under Section 9 (interim measures, etc., by court) of the Arbitration and Conciliation Act, 1996 whereby Halliburton sought to restrain Vedanta from encashing the bank guarantees provided to Vedanta.

Issue

Whether the delay in the performance due to the Covid-19 induced lockdown can be condoned.

Arguments

The counsel for Halliburton argued that even though the contractual obligations have been substantially performed, the delay in performance of the remaining portion was not complete 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 Covid-19 pandemic. It was argued that Halliburton was unavoidably handicapped in performing the contract as performance of the contract required travel of persons from overseas, as well as workmen from various parts of the country.

The counsel appearing for Vedanta argued that in law, the only ground on which invocation of a bank guarantee can be stayed, is the existence of egregious fraud, for which purpose reliance was placed on U. P. Cooperative Federation Limited v. Singh Consultants and Engineers (Private) Limited (dated November 19, 1987) and Svenska Handelsbanken v. Indian Charge Chrome (dated January 24, 1994). It was further emphasised that the contract envisaged work to be carried out by Halliburton in three wells, to be completed on January 16, 2019, March 16, 2019 and June 16, 2019 respectively and that the delay has been unconscionable, and has never been condoned, either expressly or impliedly. It was argued that Halliburton is merely seeking to piggyback and reap benefits of the Covid-19 crisis that had befallen the country.

It was further argued that the project, being an oil well, stood specifically exempted from the lockdown, as imposed by the Government, by circular dated March 26, 2020, of the Government of India. As a rejoinder to the above point, the counsel for Halliburton stated that the above mentioned exemption would not apply to Halliburton as it was not engaged in the production of oil as such, but was engaged in drilling of the wells.

Observations of the Delhi High Court

The DHC further stated on analysis of various decisions by courts, that egregious fraud is well encapsulated as one of the two grounds on which invocation of an unconditional bank guarantee may be injuncted, the second ground is of irretrievable or irreparable injury. The decision of the Supreme Court in Standard Chartered Bank Limited v. Heavy Engineering Corporation Limited (decided on December 18, 2019) was discussed, where it was held that:

“The settled position in law that emerges from the precedents of this Court is that the bank guarantee is an independent contract between bank and the beneficiary and the bank is always obliged to honour its guarantee as long as it is an unconditional and irrevocable one. The dispute between the beneficiary and the party at whose instance the bank has given the guarantee is immaterial and is of no consequence. There are, however, exceptions to this Rule when there is a clear case of fraud, irretrievable injustice or special equities. The Court ordinarily should not interfere with the invocation or encashment of the bank guarantee so long as the invocation is in terms of the bank guarantee.”

It was then concluded by the DHC that the above mentioned case of Standard Chartered Bank Limited v. Heavy Engineering Corporation Limited held that the existence of irretrievable injustice and special equities, as distinct circumstances would justify an order of injunction. It was observed that there appears to be no gainsaying the proposition that where “special equities” exist, the court is empowered, in a given set of facts and circumstances, to injunct invocation, or encashment, of a bank guarantee.

It was also observed that the counsel for Halliburton had limited his prayer to an injunction continuing up to the expiry of one week from the end of the Covid-19 related lockdown as had the lockdown not intervened, Halliburton would have been able to complete the work assigned, which was viewed as a limited amnesty by the DHC.

Decision of the Delhi High Court

The DHC declared an ad-interim stay on the invocation and encashment of the bank guarantees till the date of the next hearing and directed Vedanta to ensure that the guarantees remained live until then.

Vaish Associates Advocates View:

The DHC correctly stated that the devastation, human, economic, social and political, that has resulted as a consequence of the Covid-19 pandemic and subsequent lockdown, is unprecedented. However, it is important to note that this is not a blanket injunction and will be applicable only till the next hearing.

The principle, however is more important than the facts especially since activities regarding oil and petroleum are, in general, exempt from the rigors of the lockdown.

The DHC rightly appreciated that the facts of the activities in question require manpower and travel. Therefore, we can expect similar cases in the future, especially where bank guarantees are being/ going to be invoked, where if the facts prove that there was no possible way to complete the terms of a contract, similar relaxations will be given, unless otherwise directed by the Honourable Supreme Court.

For more information please write to Mr. Bomi Daruwala at [email protected]

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