Can Every Breach or Non-Performance be Justified or Excused on Invocation of COVID-19 as a Force Majeure: Delhi High Court Verdict

Seema JhinganPartner, LexCounsel

COVID-19 has caused tremendous economic loss, delays in project completion, missing of targets and milestones and potential breaches and disputes among contracting parties. Recently, in the matter of Halliburton Offshore Services Inc. vs Vedanta Limited & Anr. [O.M.P (I) (COMM.) No. 88/2020 & I.As. 3696-3697/2020], a petition seeking inter alia restrain on invocation of the bank guarantees issued in favour of the Respondent, the Hon’ble High Court of Delhi considered the issue of invocation of COVID-19 as a Force Majeure condition and held that “Every breach or non-performance cannot be justified or excused merely on the invocation of COVID-19 as a Force Majeure condition”. The Court further observed that it would have to take into consideration various factors to assess whether a party is genuinely prevented or justified in its non-performance due to the epidemic/pandemic.

Case Background

A contract was executed between the Petitioner and the Respondent in April 2018 for development of oil well construction, surface facilities and application of enhanced oil recovery technologies for enhancing the ultimate recovery from three fields in Rajasthan.

The initial deadline for conclusion of the entire work by the Petitioner under the contract in the three fields was January 31, 2020. The deadline for the conclusion of the entire work was further extended till March 31, 2020.

On March 18, 2020 the Petitioner invoked the Force Majeure clause under the contract and sought further time for completion of the work due to the COVID-19 pandemic. In response to the aforesaid communication, the Respondent declined the request of the Petitioner and reserved its rights under the contract.

Subsequently, the Petitioner filed a petition on April 13, 2020 before the Delhi High Court in order to restrain the Respondent from invoking the bank guarantees issued in favour of the Respondent under the contract. On the same date, the contract was terminated by the Respondent. In view of the submissions made by the Petitioner that it was working on the project till the imposition of the lockdown, the Delhi High Court (vide a different bench) passed an ad-interim order on April 20, 2020, restraining the Respondent from invoking and encashing the bank guarantees till the expiry of a period of one week from May 3, 2020 and directed that continuance of the ad-interim order was subject to completion of the pleadings and placing of all the requisite material on record.

High Court’s Observations

Once the additional material was placed on record, the High Court inter alia noted that the contract specified completion dates in respect of each of the three fields under the contract and the aforesaid dates had already been revised and that the Respondent had demanded a ‘cure plan’ considering the deadlines would not be fulfilled by the Petitioner. The High Court observed that the Petitioner was already in breach of the contractual deadlines.

The Court held that it is a 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……. 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.”

In respect of the non-adherence to the completion dates by the Petitioner which was prior to the outbreak of COVID-19, the Court held that:

“69. The past non-performance of the Contractor cannot be condoned due to the COVID-19 lockdown in March 2020 in India. The Contractor was in breach since September 2019. Opportunities were given to the Contractor to cure the same repeatedly. Despite the same, the Contractor could not complete the Project. 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”.

The Court referred to the principles related to Force Majeure laid down by the Supreme Court in the case of Energy Watchdog v. Central Electricity Regulatory Commission [(2017) 14 SCC 80] and observed that whether the non-performance or breach of contract is attributable to COVID-19 will have to be examined on the facts of each case and every breach of contract or non-performance cannot be justified or excused merely on the invocation of COVID-19 as a Force Majeure condition. The Court laid down the following factors for assessing whether a party is genuinely prevented or able to justify its non-performance due to the pandemic:

  • conduct of the parties prior to the outbreak;
  • deadlines imposed under the contract;
  • steps that were to be taken; and
  • compliances that were required to be made.

In this background, the Court held that the past non-performance of the Petitioner (Halliburton Offshore Services Inc.) cannot be condoned due to the lockdown imposed in March 2020 in India due to COVID-19. The Court held that:

“The past non-performance of the Contractor cannot be condoned due to the COVID-19 lockdown in March 2020 in India. The Contractor was in breach since September 2019. Opportunities were given to the Contractor to cure the same repeatedly. Despite the same, the Contractor could not complete the Project. 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.”

Consequently, the Delhi High Court vacated its earlier ad-interim order restraining invocation and encashment of the bank guarantees by the Respondent subject to various conditions in respect of the bank guarantees issued in favour of the Respondent for securing the advances paid to the Petitioner, such as reconciliation of accounts and opening of joint account for depositing the proceeds of the advance bank guarantees till completion of reconciliation.

Conclusion

It is evident from the judgement of the Delhi High Court that a party in breach of performance of a contract, which was required to be contractually undertaken prior to the commencement of the national lockdown, cannot take refuge from compliance by invoking Force Majeure and absolve itself from performing its contractually agreed obligations. COVID-19 is not an excuse for condonation of past breach or non-performance of contractual obligations which were expected to be completed prior to the pandemic outbreak. Additionally, the factors suggested by the High Court for determining whether the present pandemic would justify the breach or non-performance of a contract would lead the way for determining future disputes among parties arising from invocation of COVID-19 as a Force Majeure condition.

For COVID-19 related legal updates, please refer to https://lexcounsel.in/newletters/newsletters-2020/ and Mondaq at https://resources.mondaq.com/mir/articles.aspx and for COVID-19 related articles, please refer to https://lexcounsel.in/articles-2020/.