Delhi High Court: Force Majeure cannot be an excuse for condoning past non-performance of the contract
The Delhi High Court vacated the stay on invocation of Halliburton’s bank guarantees by Vedanta and said force majeure cannot be an excuse for condoning past non-performance of the contract.Background of the case:Halliburton Offshore Services Inc. and Vedanta Limited entered into a contract dated 25th April 2018 for development of three oil fields. Due to non-performance and delay,...
The Delhi High Court vacated the stay on invocation of Halliburton’s bank guarantees by Vedanta and said force majeure cannot be an excuse for condoning past non-performance of the contract.
Background of the case:
Halliburton Offshore Services Inc. and Vedanta Limited entered into a contract dated 25th April 2018 for development of three oil fields. Due to non-performance and delay, Vedanta invoked Halliburton’s bank guarantees. Halliburton invoked the Force Majeure clause and was successful in obtaining an ad-interim stay on such invocation of its bank guarantees.
Arguments by the Counsels:
Senior Counsel Gopal Subramanium, who appeared for Halliburton, prayed for an extension of the interim stay on invocation of guarantees on the ground that a substantial part of the project was already executed and only 3-5% of the total work remained incomplete. He submitted that the reason for the incomplete work is the prohibition of Halliburton personnel to travel from various foreign for installation of different kind of equipment due to Covid-19 induced lockdown (force majeure) and therefore Halliburton is entitled to an injunction.
Senior Counsel Harish Salve, appearing on behalf of Vedanta, opposed the extension of stay. He submitted that bank guarantees are independent contracts and not dependent on the main agreement between the parties. As such, they are not connected with any dispute in connection with underlying contract. He submitted correspondences between the parties to show that Halliburton is guilty of grossly delaying the execution of the project since inception and is already in breach of agreed terms before the outbreak of Covid-19.
Delhi High Court’s observation:
Justice Prathiba M. Singh observed that the project was a time-sensitive one. The monthly progress report showed that they were already in breach of its contractual deadlines much before the invocation of the force majeure clause by Halliburton. It was prima facie visible that Halliburton did not adhere to the deadlines for completion of the project and was, thus, in breach.
The Court stated, “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. Every breach or non-performance cannot be justified or excused merely on the invocation of COVID-19 as a Force Majeure condition. 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 nonperformance due to the epidemic/pandemic. It is the settled position in law that a Force Majeure clause is to be interpreted narrowly and not broadly. Parties ought to be compelled to adhere to contractual terms and conditions and excusing non-performance would be only in exceptional situations. As observed in Energy Watchdog (supra) it is not in the domain of Courts to absolve parties from performing their part of the contract. It is also not the duty of Courts to provide a shelter for justifying nonperformance. There has to be a ‘real reason’ and a ‘real justification’ which the Court would consider in order to invoke a Force Majeure clause.”
The Court was of the opinion that Halliburton defaulted in performance despite repeated opportunities by Vedanta. The Court further noted that Halliburton invoked the Force Majeure clause as a last resort. The work at the fields had stopped long before the outbreak of Covid-19 or the lockdown. The agreement excused Halliburton from the performance if it was prevented or hindered by a pandemic. However, every breach or non-performance cannot be justified or excused merely on the invocation of Covid-19. Therefore, past non-performance by Halliburton cannot be condoned and force majeure cannot be an excuse for non-performance of the contract.
Justice Singh referred to the judgment of the Supreme Court in the matter of Energy Watchdog v. Central Electricity to elaborate on the details of principles of Force Majeure where the Apex Court had made it clear that an Injunction against invocation of bank guarantees can be issued only in extreme situations, which was not the case in the current dispute.
Justice Singh vacated the interim stay on invocation of Halliburton’s bank guarantees and stated that the parties were free to pursue arbitration.