To say that COVID-19 has plunged commerce and business into an unprecedented crisis would be stating the obvious.
The basic functioning of trade through contracts has been disrupted wherein parties are not in a position to honor their contractual obligations and consequently are anticipating significant financial consequences is the form of penalties, damages and invocation of bank guarantees.
The unanticipated disruption of contracts and its non-performance due to COVID-19 has elevated, more than ever, the grave importance of the concept of "Force Majeure". The text of "Force Majeure" clauses and the conduct of the parties prior to such invocation would be essential to determine whether the invocation was lawful/justified or was it a mere defence by a party to escape contractual obligations and its performance.
In this context, the Delhi High Court (“DHC”) in the case of Halliburton v Vedanta Limited had an occasion to deal with this ever-important principle of law.
Facts of the Halliburton Case:
Without going into the intricacies of the mammoth contract, the simple facts revolving the present dispute was that the underlying agreement between Vedanta Limited ("Vedanta") and Halliburton Offshore Services Inc ("Halliburton") stated that Halliburton will carry out 'Drilling & Completion' and 'Surface Facility' operations for a Petroleum Project in Rajasthan.
More pertinently, it was also agreed between the parties that time was of essence in the said contract. In other words, it was expressly agreed that the parties are to perform their contractual obligations within the timeframe agreed under the contract.
After granting prior extensions, Vedanta had insisted that the work in all three fields be completed by 31st January 2020. However, by mutual agreement between parties the deadline was further extended to 31st March 2020.
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The dispute between parties arose when on 18th March 2020, just before the scheduled deadline for completion; Halliburton invoked the "Force Majeure" clause seeking further time for the completion of the Project.
Vedanta replied on 31st March 2020 proposing termination of the contract and consequential invocation of bank guarantees.
As a result, Halliburton approached the Delhi High Court on 13th April 2020, (also the date when Vedanta terminated the contract) and obtained an ad-interim injunction order restraining the invocation and encashment of bank guarantees.
Questions framed by the Delhi High Court:
Post the completion of the pleadings by the parties, when the matter was taken up for disposal, the Delhi High Court had framed two questions:
Whether COVID-19 can provide succour to a party in breach of contractual obligations?
And, whether the invocation of the 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?
In simple terms, the questions before the Court was whether, COVID-19 can be a defence for a party in breach of its contractual obligations and whether a party can seek relief of injunction on account of “Force Majeure” if the breach occurred prior to the "Force Majeure" event.
The "Force Majeure" defence by Halliburton:
Interestingly, the contract governing the dispute between Halliburton and Vedanta contained a "Force Majeure" clause wide enough to include a pandemic, which should be incorporated in all commercial contracts, as a matter of practice.
In light of the same, it was urged on behalf of Halliburton that "Force Majeure" squarely applies in view of the outbreak of COVID-19. The plea of "Force Majeure" was substantiated further by contending that the equipments, which are to be installed require personnel to travel from various foreign countries and this was not possible due to the "lockdown".
On the contrary, it was argued by Vedanta that the breach of contractual obligations was much prior to the outbreak of COVID and one cannot conveniently take shelter under the “Force Majeure" clause for a breach of contractual deadlines.
The nexus between Impossibility of Performance and the "Force Majeure" event:
It is indeed a matter of fact that a "Force Majeure" clause is drafted under a commercial contract with an intention of protecting the parties from an expected supervening event. This is firmly established upon the principle, les non cogitadimpossibilia, which means that "the law will not compel a man to do what he cannot possibly perform".
However, it goes without saying, that the inability or the impossibility of performance must have a direct nexus with the unexpected supervening event which rendered performance "impossible" and not merely unviable. The relevant intervening event and the damage it could cause have to be evaluated.
Inconvenience and difficulty in performance would not suffice to invoke "Force Majeure". Amongst other imperative criteria to invoke "Force Majure", it is paramount that the party seeking to rely on the clause may also need to demonstrate that the performance of the said party was prevented by the "Force Majeure" condition.
Findings of the Court to the questions raised:
The Delhi High Court held that a party invoking COVID-19 as a "Force Majeure" event would have to be determined on a case-to-case basis. Though, COVID-19 is a "Force Majeure" event justifying exemption of breach and non-performance, every such breach and non-performance cannot be protected or excused by invocation of COVID-19 as a "Force Majeure" event.
The conduct of parties prior to the outbreak ought to be examined on a case-to-case basis to ascertain whether a party on genuine grounds could not perform the contract. It also has to be seen whether COVID-19 or any other "Force Majeure" event cited by a party was the "real reason" and "real justification" of non-performance.
The Delhi High Court applied the principles laid down in the "Energy Watchdog1" case and held that the exercise of relief by Courts in cases of "Force Majeure" has to considered narrowly and not broadly, wherein parties must perform their contractual obligations and that non-performance can be excused or absolved only in exceptional circumstances.
The Court also held that the past conduct of non-performance of parties cannot be condoned due to COVID-19. As Halliburton was in breach since September 2019, the company could not be excused for nonperformance where deadlines were breached much before COVID-19.
Law on Invocation of Bank Guarantee also considered:
While analyzing the defence of "Force Majeure" in the facts of this case, the Court also considered the general law applicable to invocation of Bank Guarantees which was laid down in the case of Standard Chartered v Heavy Engineering Corporation Ltd &Ors2.
It is trite law that the Courts should not normally grant an order of injunction to restrain the realization or encashment of a bank guarantee or a letter of credit.
On the other hand, the bank giving such guarantee is bound to honor it as per its terms irrespective of any dispute existing between the party and the beneficiary. The principle is that the Courts shall interfere only if there should be 'serious dispute' and a prima facie case of fraud and special equities in the form of preventing irretrievable injustice.
It is now judicially pronounced that COVID-19 is "Force Majeure" event, but COVID-19 cannot be a straight-jacket defence available to parties unless its invocation is justified and parties can directly attribute reasons of breach or non-performance for reasons purely and only on account of COVID-19.
Parties cannot seek to hide and deviate themselves from performance obligations, when COVID-19 cannot help justify breach or non-performance.
In the above case, Halliburton failed to satisfy that the breach and non-performance was directly and solely attributable to COVID-19. The Court noted that Halliburton had committed breach much before the pandemic and was guilty of non-performance. Hence, the conduct or performance of commercial contracts between parties prior to invocation is another principle of introspection elucidated by the Delhi High Court.
This verdict of the Delhi High Court is a classic example to show that COVID-19 or any other supervening force cannot be conveniently used as a shield of "Force Majeure". It is indispensable that the party invoking "Force Majeure" in any commercial contract must demonstrate that the non-performance or breach is directly attributable to the event of COVID -19.
Pawan Jhabakh and Salai Varun are advocates practising in the Madras High Court. The views expressed are personal.