Assignment on Judgement Note by Kunal Shekhar (23010036)

HALLIBURTON OFFSHORE SERVICES INC. v. VEDANTA LIMITED & ANR.

Citation: O.M.P. (I) (COMM) & I.A. No. 3697/2020

Court: High Court of Delhi

Judge: Hon'ble Mr. Justice C. Hari Shankar

Date: April 20, 2020

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Judgement Brief Overview:

The Hon’ble High Court of Delhi on 20th April 2020, in the case of Halliburton Offshore
Services Inc. (Petitioner) vs Vedanta Limited and Anr (Respondent), delivered its Order
adjudicating a petition under Section 9 of the Arbitration and Conciliation Act, 1996.
Notably, the aforesaid petition was filed by the Petitioner seeking interim protection by
way of restraint against Respondent, thereby injuncting it from encashing the eight bank
guarantees furnished by the Petitioner as part of the contract executed between the
parties for the development of three petroleum fields. The Court, upon considering the
existing legal jurisprudence pertaining to the circumstances and scenarios in which
interim injunctions, restraining the invocation of unconditional bank guarantees could
be granted ruled in favour of the Petitioner.

The present case comment begins with a brief narration about the facts of the case
including a summary of the arguments advanced by both the parties. The second part of
the case comment explores the limitations and exceptions on invocation of bank
guarantees, and the related judicial precedence relied upon by the Court. The third and
final part of the case comment thereafter deep dives into the Court’s observations in its
Order and attempts to critique the judgment vis-à -vis the legislative intent of the Act,
1996.

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Brief Facts:

1. The Contractor was selected via competitive bidding to carry out different sets of
works for the development of end-to-end integrated Oil Well Construction at
three fields namely ‘Mangala’, ‘Bhagyam’ and ‘Aishwarya’ (“MBA fields”) in
Rajasthan. On 25th April 2018, a Contract was entered into with the Company
amounting to USD 197 Million for period of two years for completion of the work
in MBA fields. [Para 1 @Pg 1-2]
2. The original completion dates as per the Contract were 12 month, 14 months and
17 months i.e. 16th June 2019, 16th March 2019 and 16th January 2020 for the
MBA fields respectively. However, as delays were caused in completion of the
project on 25th November 2019, the Contractor was called upon to give its cure
plan. [Para 2 @Pg 2]
3. On 05th December 2019, the Contractor submitted its cure plans for each of the
fields, thereby submitting that the work would be completed by 31st January
2020, 29th February 2020, and 31st March 2020 for the MBA fields respectively.
However, the said cure plan was not accepted by the Company and vide its letter
dated 16th January 2020 informed the Contractor that it would use alternative
sources to complete the project if the entire project did not achieve completion
by 31st January 2020. [Para 3 @Pg 2]
4. Thereafter, the Contractor vide its letter dated 18th March 2020 invoked Force
Majeure clause due to outbreak of COVID-19. The Company then on 31st March
2020 issued a notice informing the Contractor that the balance activity will be
completed by alternative sources. [Para 4,5 @Pg 3]
5. On 13th April 2020, the Contractor filed a Petition against the Company and
sought an injunction order against the Company from invoking the bank
guarantees issued by the Contractor. On 13th April 2020, the Company
terminated the Contract on various grounds and invoked the bank guarantees.
[Para 6 @Pg 3]
6. The matter was heard on 15th April 2020 through videoconferencing, the
Hon’ble Court on prima facie facts presented before it passed an ad-interim
injunction order restraining invocation or encashment of the bank guarantees till
expiry of one week from 03rd May 2020 till which the date of lockdown stood
extended. The Hon’ble Court also granted an ad-interim stay till the next date of

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hearing. The Hon’ble Court clarified that the continuance of this interim
injunction would be examined on completion of the pleadings as all facts and
documents were not placed on record. [Para 7,8 @Pg 5,6,7]

Issues:

1. Was COVID-19 the cause of the non-performance in the present case?

2. Whether COVID-19 can provide succour to a party in breach of contractual
obligations? and
3. Whether invocation of Bank Guarantees is liable to be injuncted on the grounds
of Force Majeure i.e., COVID-19, if the breach occurred prior to the outbreak?

Submissions made on behalf of the Contractor:

1. A substantial portion of the project was completed and only 3-5% of the project
remained; [Para 9 @Pg 7]
2. The Company had knowledge that the kind of equipment to be installed required
personnel to travel from various foreign countries, which was not possible due to
lockdown; [Para 10 @Pg 7]
3. Force majeure squarely applies in view of the outbreak of COVID-19 globally;
[Para 10 @Pg 8]
4. The Company had agreed to extend Contract initially till 31st March 2020 via
cure plan; [Para 11 @Pg 8]
5. Reliance was placed on a variation order no.3 dated 16th January 2020 which
was issued by the Company and was duly counter signed by the Contractor
through which the Contract was extended till 30th June 2020; [Para 12 @Pg 9]
6. The letter issued by the Director General (Hydrocarbons) exempted work in oil
and gas production, however the same would not exempt the Contractor’s work;
[Para 14 @Pg 10]
7. The bank guarantees were valid till 2021, thus the liabilities of the Company was
secure. [Para 16 @Pg 10]

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Submissions made on behalf of the Company:

1. The Bank Guarantees are independent contracts and are not subservient to the
main contract. The standard that would be applied in cases of invocation of bank
guarantee is whether the invocation is liable to be stayed on the ground of
egregious fraud or special equities. Which would not apply in the present case;
[Para 22 @Pg 13]
2. The Contractor is guilty of grossly delaying the execution of the project since
inception and was in breach prior to the outbreak of COVID-19 and invoking
Force Majeure; [Para 23 @Pg 13]
3. The cure plan was not accepted by the Company; [Para 28 @Pg 15]
4. The letter of the Director General of Hydrocarbons clearly shows that petroleum
and other related functions constitute exempted services (being essential
services under the exemption list) and thus there is in fact no suspension of work
in these areas; [Para 31 @Pg 18]
5. The question whether Force Majeure is rightly invoked or not is itself a
contractual dispute which is beyond the scope of section 9; [Para 32 @Pg 18]
6. The fact that further time is given to the Contractor to complete the Project, does
not mean that the right of liquidated damages is waived or that the Bank
Guarantees cannot be invoked for non-performance. [Para 33 @Pg 19]

Decision of the court:

The Court held that the Contractor was in breach since September 2019, and the Force
Majeure clause does not afford any succour or shelter to the Contractor, at this stage, to
seek restraint against encashment of the Bank Guarantees. The Court also held that the
ad-interim order ought not to be continued in favour of the Contractor. If the parties are
unable to reconcile, they are free to approach the Arbitral Tribunal under Section 17 of
the Act.

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Observations made by the Hon’ble Court:

1. The Contract was time-sensitive; [Para 34 @Pg 19]

2. The Contractor had the ‘option’ to extend the term of the Contract on the
identical terms and conditions, which was proposed by the Contractor vide its
cure plan, however the same was rejected by the Company; [Para 36 @Pg 20]
3. As per the minutes of the meeting held between the parties, the completion dates
were extended till March 2020; [Para 45 @Pg 24]
4. The monthly progress report indicated that there was miniscule work/no work
carried out during the period of November 2019 to March 2020, showing that the
Contractor did not adhere to the deadlines for completion of the project and thus
was in breach; [Para 53 @Pg 32]
5. The Court relied on the principles laid down by the Supreme Court in the case of
Energy Watchdog vs Central Electricity Regulatory Commission, [(2017) 14 SCC
80]. Following are the principles laid down by the Supreme Court [Para 57 @Pg
34, 35, 36]
a. Force Majeure would operate as part of a contract as a contingency under
section 32 of the Indian Contract Act 1872 (‘ICA’).
b. Independent of the contract sometimes, the doctrine of frustration could
be invoked by a party as per Section 56, ICA.
c. The impossibility of performance under Section 56, ICA would include
impracticability or uselessness keeping in mind the object of the contract.
d. If an untoward event or change of circumstance totally upsets the very
foundation upon which the parties entered their agreement it can be said
that the promisor finds it impossible to do the act which he had promised
to do.
e. Express terms of a contract cannot be ignored on a vague plea of equity.
f. Risks associated with a contract would have to be borne by the parties.
g. Performance is not discharged simply if it becomes onerous between the
parties.
h. Alteration of circumstances does not lead to frustration of a contract.

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i. Courts cannot generally absolve performance of a contract either because

it has become onerous or due to an unforeseen turn of events. Doctrine of
frustration has to be applied narrowly.
j. A mere rise in cost or expense does not lead to frustration.
k. If there is an alternative mode of performance, the Force Majeure clause
will not apply.
l. The terms of the contract, its matrix or context, the knowledge,
expectation, assumptions, and the nature of the supervening events have
to be considered.
m. If the Contract inherently has risk associated with it, the doctrine of
frustration is not to be likely invoked.
n. Unless there was a break in identity between the contract as envisioned
originally and its performance in the altered circumstances, doctrine of
frustration would not apply.
6. Under the Contract, if either party is prevented, hindered or delayed from
performing any obligation by an event or circumstances beyond the control of
the party, then Force Majeure clause could be invoked. The Force Majeure clause
of the Contract inter alia included an event that “prevented or hindered or
delayed by any natural event including a pandemic or plague”. However, as per
the Company the delay caused by the Contractor was prior to the present
pandemic of COVID-19 and thus cannot be considered to be a Force Majeure
event; [Para 60 @Pg 38]
7. In the rejoinder filed by the Contractor, the Hon’ble Court observed that a fresh
case was made out. Wherein, there was a variation made to the Contract in the
manner of a “variation order”. This variation order was as per clause 10 of the
Contract, wherein, on the Company requesting for a variation and the Contractor
submitting its variation order along with adjustment to the milestone dates, on
reaching an agreement, the milestone dates of the Contract were to be suitably
amended. The Hon’ble Court observed that this variation order was neither
pleaded by the Contractor in its Petition or by the Company in its reply, nor have
the parties relied upon the same in their correspondence. It was the case of the
Contractor that the variation order no.3 extended the Contract till 30th June
2020. The Hon’ble Court observed that the binding nature of the variation order

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would be adjudicated in trial before the arbitral tribunal and did not place
reliance on the said contention; [Para 72 @Pg 43]

8. The Hon’ble Court also relied on Leighton India Contractors P Ltd. vs. DLF Ltd. &
Ors. wherein, it was held that the powers under Section 9 of the Arbitration &
Conciliation Act, 1996 are broad and interim measures of protection can be
granted. [Para 80 @Pg 52]

Findings of the Hon’ble Court:

1. Breach of a contract has to be examined on the facts and circumstances of each

case. Breach or non-performance cannot be justified merely on the invocation of
COVID-19 as a Force Majeure condition. [Para 62 @Pg 39]
2. It is the settled position that a Force Majeure clause is to be interpreted narrowly
and not broadly. [Para 63 @Pg 39]
3. It is also not the duty of the 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. There is nothing
on record to show the steps taken by the Contractor towards mitigation, which
was necessary as per the Force Majeure clause. [Para 63 @Pg 39]
4. 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 before the outbreak itself. [Para 65 @Pg
40]
5. The law relating to Bank Guarantees is extremely clear and has been repeatedly
settled by the Supreme Court including in Standard Chartered Bank v. Heavy
Engineering Corporation Ltd. & Ors. Relevant extracts from the judgment – “The
dispute between the beneficiary and the party at whose instance the bank has
given the guarantee is immaterial and is of no consequence. There are, however,

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exceptions to this Rule when there is a clear case of fraud, irretrievable injustice
or special equities. The Court ordinarily should not interfere with the invocation
or encashment of the bank guarantee so long as the invocation is in terms of the
bank guarantee.” [Para 78 @Pg 50,51]

Own Overview:

In the midst of the COVID-19 pandemic, a dispute arose between M/S HALLIBURTON
OFFSHORE SERVICES INC. (Halliburton) and VEDANTA LIMITED (Vedanta) regarding a
contract for the development of oil wells in Rajasthan, India. The lockdown imposed by
the Indian government in response to the pandemic prevented Halliburton from
continuing its work on the project, leading to Vedanta's termination of the contract and
invocation of eight bank guarantees provided by Halliburton as security for its
performance.

Halliburton challenged Vedanta's actions by seeking an injunction from the High Court
of Delhi to restrain Vedanta from encashing the bank guarantees. The central issue in
this case was whether the lockdown constituted a force majeure event, excusing
Halliburton from fulfilling its contractual obligations.

The High Court, presided over by Hon'ble Mr. Justice C. Hari Shankar, recognized the
lockdown's disruptive impact on Halliburton's ability to perform the contract and
concluded that it qualified as a force majeure event. The Court further determined that
Vedanta's termination of the contract and invocation of the bank guarantees were
unjustified, as Halliburton had not been granted a reasonable opportunity to cure any
breach of contract and the invocation would cause irreparable harm to Halliburton.

In its ruling, the High Court granted Halliburton's petition and restrained Vedanta from
encashing the bank guarantees. This decision highlighted the significance of force
majeure provisions in contracts and the need for parties to consider the impact of
unforeseen events beyond their control.

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Conclusion:

While Indian courts have, historically, adopted a pattern of eschewing grant of

injunctions against invocation of bank guarantees, this order makes it evident that they
are aware of the unprecedented gravity of the Covid19 pandemic, and the significant
disruption it has caused to businesses all over the world. Significantly, the High Court
appears to have gleaned a broader definition of ‘special equities’ for granting such
injunctions and has taken possibly a practical and equitable approach to the same.
While this is an ad-interim injunction only, and the final hearing could yield a different
result, until such time, parties who find themselves in similar circumstances can be
hopeful that other Indian courts will also adopt such an approach, which may serve to
mitigate adverse financial impacts in an already difficult time.

Recently, the Bombay High Court (order dated 8 April 2020 in Comm Arb. Pet. Nos. 404
to 408 of 2020) in different factual circumstances had declined to grant an ad-interim
injunction restraining suppliers of steel products from invoking and encashing BGs.
Thus, as rightly stated by the Delhi High Court, each matter will be considered based on
its unique facts and circumstances and whether the pandemic has created special
equities therein will be dependent upon the same.

The lockdown caused due to the pandemic of COVID-19 could invoke the Force Majeure
clauses in a contract, however, parties cannot take shelter under this situation to hide
contractual breaches that have occurred before or escape from their contractual
obligations. As held by the Delhi High Court in the present case “Parties ought to be
compelled to adhere to contractual terms and conditions and excusing non-performance
would be only in exceptional situations.”

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