Delhi High Court: Arbitrability of Dispute Regarding Wrongful Invocation of Force Majeure Clause is to be decided by the Arbitral Tribunal and not by Court in a Section 9 Petition

Delhi-High-Court

In M/S Halliburton Offshore Services Inc. v. Vedanta Limited & Anr. O.M.P (I) (COMM.) No. 88/2020 decided on 29 May 2020, the Delhi High Court was called upon to decide an interesting issue in respect of pre-arbitration interim measure from Court owing to invocation of Force Majuere clause by the Contractor due to prevailing lockdown in India in the wake of COVID-19. In a production sharing project, the Contractor warranted that it would achieve the milestones as per the milestone dates contained in the contract and failure to achieve the milestones entailed payment of liquidated damages. Further, if there was any failure to pay the liquidated damages the Employer could withdraw the said amounts from the various bonds/Bank Guarantees given by the Contractor. Thus, that time was of essence in the contract and the liquidated damages recoverable were pre-estimated and prescribed in the contract itself.

The Contractor was not able to abide by the milestone dates which resulted in Employer to ask for a ‘cure plan’ from the Contractor, though it had the option of terminating the contract. Thus, by this time, the Contractor was already in breach of its contractual deadlines. Nonetheless, the Contractor submitted the ‘cure plan’ which was not acceptable to the Employer and who then intimated Contractor to modify the ‘cure plan’ while reserving its rights to take appropriate measures. However, even the modified ‘cure plan’ was not acceptable to the Employer which led Contractor to invoke the Force Majeure clause owing to commencement of lockdown due to COVID-19 by that time. This led Employer to inform the Contractor that it will terminate the contract and use alternative sources to complete the remaining work. Thus, while the Contractor relied upon Force Majeure as the justification for the non-completion of the work, the Employer’s stand was that the timelines were not adhered to and that the Contractor was in breach even prior to the occurrence of the Force Majeure event.

In response to the Employer’s threatening to terminate the contract, the Contractor filed an application under Section 9 of the Arbitration & Conciliation Act, 1996 (‘the Act’) before the Delhi High Court seeking interim measures inter alia directions from the Court to restrain the Employer from encashing the Contractor’s Bank Guarantees along with other such reliefs. Post the filing of the petition, the Employer terminated the contract and the Contractor was called upon to take all steps required to give effect to the termination as per the contractual terms. On the same day, the Bank Guarantees were also invoked by the Employer. In the preliminary proceedings, the Delhi High Court granted an ad-interim order restraining the encashment of Contractor’s Bank Guarantees by the Employer.

Later, the pleadings were completed, and matter was ripened for final hearing at which stage certain crucial correspondence were filed by the Contractor. Basis the additional documents submitted, the Delhi High Court observed that the work had stopped long before the outbreak of COVID-19 or the lockdown from which it was prima facie visible that the Contractor did not adhere to the deadlines for completion of the work and was, thus, in breach. In the pleadings, the Contractor claimed USD 250 million towards Liquidated damages and losses and the Contractor claimed USD 91 million under various heads.

Now, the question before the Delhi High Court was whether Force Majeure event was the cause of the non-performance of contract by the Contractor. If so, is the encashment of Bank Guarantees liable to be injuncted?

After analysing the contractual terms, various correspondence which ensued between the parties and the judicial precedents on Force Majeure, the Court held as under:-

  • Every breach or non-performance cannot be justified or excused merely on the invocation of COVID-19 as a Force Majeure condition.
  • 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.
  • 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 non-performance. 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 past non-performance of the Contractor cannot be condoned due to the COVID-19 lockdown in March 2020 in India.
  • 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.
  • Whether the Force Majeure clause itself would apply or justify non-performance in the facts of the case would have to be finally determined in the arbitral proceedings.
  • Thus, the Force Majeure clause does not afford any succour or shelter to the Contractor, at the stage of Section 9 petition, to seek restraint against encashment of the Bank Guarantees.

In view thereof, the Court vacated the ad-interim injunction granted earlier finding that it was prior to the completion of pleadings by the parties and does not deserve to be continued in favour of the Contractor, for the aforesaid reasons. Thus, the Court directed that the respective claims and counterclaims of the parties are to be adjudicated by the duly constituted Arbitral Tribunal, on their own merits, in accordance with law.

Disclaimer: The views expressed in this post are mine and do not reflect the views of the organisation(s) I am engaged with

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