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Force Majeure Event – Injunction Against Invocation of a Bank Guarantee During Lockdown

Judgment: M/s Halliburton Offshore Services Inc. Vs. Vedanta Limited & Anr. [O.M.P. (I) (COMM) 88/2020 & I.A. 3697/2020]

Forum: Hon’ble High Court of Delhi (“Court”)

Judgment delivered on: April 20, 2020

Act/Law: Arbitration and Conciliation Act, 1996 (“Act”).

Ratio: Special equities in order to prevent irretrievable harm or injustice is a ground for injuncting invocation/encashment of bank guarantee.

Background: Petition was filed under Section 9 of the Act by Halliburton Offshore Services Inc. (“Petitioner”) seeking interim injunction against Vedanta Limited (“Respondent No. 1”) from invoking/encashing eight bank guarantees issued by ICICI Bank Limited (“Respondent No. 2”) under instructions of the Respondent No. 1. The Petitioner and Respondent No. 1 had entered into a contract dated April 25, 2018 (“contract”) for integrated development of three blocks (Mangala, Bhagyam and Aishwarya, together denoted by the acronym “MBA”) pursuant to the floating of an international tender by Respondent No. 1 and acceptance of the offer of the Petitioner by the Respondent No. 1. In terms of the contract, various bank guarantees were furnished by the Petitioner, of which, the instant petition concerned eight bank guarantees. Stating that the Petitioner intended to invoke arbitration, Petitioner moved the application seeking the relief of interim injunction continuing up to the expiry of one week from the lifting of the lockdown (currently operative till May 3, 2020) under Section 9. The Petitioner apprehended the likelihood of termination of the contract by Respondent No. 1, and consequent invocation and encashment of the bank guarantees provided by the Petitioner, which could cause irreparable prejudice to the Petitioner.

Contending that even though the project was to be completed by March 31, 2020 by the Petitioner as per the extended timeline (reliance was placed on communication dated March 31, 2020 of Respondent No. 1), the Petitioner argued  that owing to a complete lockdown, severe impact has occurred on industrial activities as well as on movement of persons in the country and from overseas, including, specifically the state of Rajasthan consequent to the COVID-2019 pandemic as a result of which the Petitioner was unavoidably handicapped in performing the contract. The Petitioner also stated that it had invoked the force majeure clause contained in the contract vide its communications dated March 18, 2020 and March 25, 2020 to Respondent No. 1 seeking the benefit thereof. The Respondent No. 1 countered the arguments of the Petitioner basing its arguments broadly on two grounds – firstly, it was contended that in law, the only ground on which invocation of a bank guarantee can be stayed, is the existence of egregious fraud (reliance placed upon U. P. Cooperative Federation Ltd v. Singh Consultants and Engineers (P) Ltd. [(1988) 1 SCC 174] and Svenska Handelsbanken v. Indian Charge Chrome [(1994) 1 SCC 502)], and it was contended that in the present case, there are only bald and baseless assertions in that regard and secondly, that the Respondent No. 1 had neither extended the timeline of the project nor condoned the delay caused by the Petitioner in completing the project and that the Petitioner had concealed all such communications of the Respondent No. 1 to the Petitioner including the ones asking the latter to complete the work assigned to it under the contract. It was also submitted that the plea of force majeure, is an afterthought, and cannot constitute a justifiable basis to grant an injunction, as sought by the Petitioner, especially in light of the Circular dated March 26, 2020 of the Government of India which specifically excluded the project in question from the lockdown.

Analysis: The question before the Court for adjudication was whether the invocation of force majeure clause in the contract by the Petitioner in the present situation of COVID-19 pandemic resulting in countrywide lockdown is justifiable or not and that whether the invocation of bank guarantee can be stayed as an ad-interim measure in the present prevailing situation of COVID-19.

The Court was prima facie of the view that the submission of the Respondent No. 1 that judicial interference with invocation or encashment of bank guarantees, where they are unconditional, is permissible only in cases of egregious fraud, is not acceptable in view of the decision of Hon’ble Supreme Court in U. P. Cooperative Federation Ltd. (supra), followed in Svenska Handelsbanken (supra) wherein it was held that “in order to restrain the operation either of irrevocable letter of credit or confirmed letter of credit or bank guarantee, there should be serious dispute and there should be good prima facie case of fraud and special equities in the form of preventing irretrievable injustice between the parties.” The Court further went on to elaborate that the Apex Court’s decision in U. P. State Sugar Corporation Vs. Sumac International Ltd [(1997) 1 SCC 568], where it was held that the court has carved two exceptions, first being fraud in connection with such a bank guarantee that would vitiate the very foundation of such a bank guarantee and the second one relating to the cases where allowing the encashment of an unconditional bank guarantee would result in irretrievable harm or injustice to one of the parties concerned. Further, the Court, citing the principles laid down in Himadri Chemicals Industries Ltd v. Coal Tar Refining Co. [(2007) 8 SCC 110] opined that while egregious fraud is well-encapsulated as one of the two grounds on which invocation of an unconditional bank guarantee may be injuncted, the contours of the second ground, of irretrievable or irreparable injury are somewhat more elastic.

Deliberating upon the significance of “special equities”, the Court held that while the earlier understanding of the expression “special equities”, as a circumstance in which invocation of bank guarantees could be inducted, was that such equities were limited to cases where irretrievable injustice resulted, however, the recent decision of Hon’ble Supreme Court in Standard Chartered Bank Ltd Heavy Engineering Corporation Ltd (2019 SCC Online SC 1638) seemed to visualise irretrievable injustice, and special equities, as distinct circumstances, the existence of either of which would justify an order of injunction and the Court concluded 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.

The Court thereafter held that special equities do exist, as would justify grant of the prayer, of the Petitioner, to injunct the Respondent No. 1 from invoking the bank guarantees of the Petitioner, till the expiry of a period of one week from  May 3, 2020, till which date the lockdown has been imposed.

Conclusion: The Court’s decision acknowledged that the lockdown was prima facie in the nature of force majeure since such a lockdown is unprecedented, and was incapable of having been predicted by either of the parties and that special equities do exist in the case, justifying a grant of the prayer of the Petitioner. In our view, the Court has tried to adequately balance the equities in a nuanced manner by observing that in case the bank guarantees are allowed to be encashed, even while the lockdown is in place, the resultant injury and prejudice to the Petitioner would be irretrievable. The Court’s cautionary tone while granting the interim injunction in favour of the Petitioner till the expiry of one week from lockdown (as was prayed) is suggestive of the fact that the Court was cognizant of the unconditional rights of the Respondent to invoke the bank guarantee in terms of the contract as well as the genuine hardship caused to the Petitioner during this unprecedented event.

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