COVID-19 Lockdown: An event of force majeure or not? A brief overview of the recent orders passed by the Hon'ble high courts of Bombay and Delhi

Due to the lockdown imposed by the Government of India, transport and travel in international and domestic routes, including travel through land borders has been restricted. Even the Courts across the nation have been submitted to restrict its functioning only to urgent matters thereby leaving no stone unturned with respect to the dispensation of justice.

In wake of these unprecedented challenges being faced by the country, the Hon'ble High Court of Judicature at Bombay ('Hon'ble High Court of Bombay') and the Hon'ble High Court of Delhi have come up with Judicial decisions where the clauses of Force Majeure envisaged under the respective contracts have been again the subject-matter of judicial review, in turn arising out of the outbreak of the Novel Coronavirus ('COVID-19') and the subsequent lockdown imposed by the Ministry of Home Affairs ('MHA'), Government of India on 24.03.2020[1] and  on 14.04.2020[2] respectively.

On 08.04.2020, the Hon'ble High Court Bombay vide its Order passed in a batch of Petitions filed by Steel Importers (collectively referred to as 'Petitioners'), titled Standard Retail Pvt. Ltd. v. M/s G.S. Global Corp & Ors.[3] ('Standard Retail Case') rejected Ad-Interim reliefs to the Petitioners who were seeking directions to restrain Wells Fargo Bank ('Respondent Bank') from encashing/negotiating the Letter of Credits ('LCs') to avoid their Contractual Obligations owing to the Covid-19 Pandemic.

Thereafter on 20.04.2020, the Hon'ble High Court of Delhi vide its Order passed in Halliburton Offshore Services vs Vedanta Ltd & Anr.[4] ('Halliburton Case') granted ad-interim relief against the invocation of eight Bank Guarantees ('BGs') issued/submitted by Halliburton Offshore Services ('Petitioner') in favour of Vedanta Ltd. ('Respondent No. 1'). Vide the aforesaid Order, the Hon'ble High Court of Delhi held that the lockdown imposed across the country amidst COVID-19 is prima facie a Force Majeure Event based on the exception of 'special equities' in order to prevent irreparable harm being caused to the Petitioner.

Before delving into the comparative analysis of the findings in the aforesaid Orders, it is imperative to note the factual background and observations of the respective High Courts in each of the cases.

I. STANDARD RETAIL CASE

Background of the Case

The Petitioners entered into contracts with South Korean entities, G. S. Global Corp (Comm Arb Petition No. 404, 405 and 406 of 2020) and Hyundai Corp (Comm Arb Petition No. 407 and 408 of 2020) ('Respondent No. 1/Respondent Sellers') for supply of certain steel products from South Korea to Mumbai. The contracts between the Petitioners and Respondent Sellers were on Cost and Freight basis ('CFR'), inter alia, subject to the general terms and conditions including clauses for force majeure and other governing laws.

The Respondent Sellers, having its head office in South Korea, had carried out its part of the contractual obligation and had shipped certain steel products from South Korea to the Petitioners at Mumbai. However, the Petitioners terminated the Contracts with Respondent Sellers by invoking the doctrine of frustration envisaged under Section 56 of the Contract Act, 1872[5], on grounds of impossibility and impracticability in light of the COVID-19 pandemic and the subsequent lockdown thereafter imposed by the Government of India.

In view of the above facts and circumstances, the Petitioners filed Petitions under Section 9 of the Arbitration and Conciliation Act, 1996 seeking to restrain the Respondent Bank from encashment of LC. The Petitioners placed reliance on Section 56 of the Indian Contract Act, 1972 the grounds of frustration, stating impossibility and impracticability to withdraw from their contractual obligations of making payments to the Respondent Sellers amidst COVID-19 pandemic and the subsequent lockdown imposed by the government.

In support of the aforesaid, the Petitioners relied upon the celebrated Judgments of the Hon'ble Supreme Court in Energy Watchdog Vs. CERC[6] and Satyabrata Ghose Vs. Mugneeram Bangure & Co.[7] wherein the law regarding Section 56 of the Indian Contract and Force Majeure has been laid down.

Findings of the Court:

Firstly, The Hon'ble High Court of Bombay opined that LCs were an independent transaction between the Petitioners and the Respondent Bank, and therefore the encashment is not concerned with the inter se dispute between the parties to the contract under which such LCs have been issued. The Court further pointed out that upon a bare perusal of the ‘Force Majeure' clause 11 and 12[8] of the Contracts contained in the contracts, it clearly evinces that the same was only applicable to the Respondent Sellers and there was no indication that the Petitioners, may also derive the benefit of relaxation on account of a 'Force Majeure' event.

Secondly, the Hon'ble High Court of Bombay held that since the contract terms are on CFR basis, the Petitioners cannot rely upon the clause to allow non-payment for the goods that have been dispatched by the Respondent Sellers.

Thirdly, the Hon'ble High Court of Bombay observed that as per the Government Notifications, distribution and movement of steel was an essential service. Thus, no restrictions were imposed on its movement and all ports and port related activities were operative during the Covid-19 lockdown.

The Hon'ble Court further opined that the lockdown is only for a limited duration and therefore Petitioners cannot resile from fulfilling its obligations set out under the contracts.

In view of the aforesaid, The Ld. Single Bench at the Hon'ble High Court of Bombay held that the Petitioners are not entitled to any Ad-Interim reliefs under the said circumstances as mentioned supra.

II. HALLIBURTON CASE

Background of The Case

Petitioner and Respondent No.1 entered into a contract for development of three fields in Rajasthan namely, Mangla, Bhagyam and Aishwarya on 25.04.2018. As per the terms of the contract, Petitioner furnished eight BGs in favour of Respondent No. 1. Five out of the eight BGs were due to expire on 20.06.2020 and the remaining three on 24.11.2020. It is noteworthy that the performance under the contract was due for completion on 31.03.2020. During the course of the contract, several disputes arose between the parties. On 18.03.2020 and 25.03.2020, the Petitioner invoked the Force Majeure clause on account the lockdown imposed by the Government of Rajasthan as well as Government of India vide orders dated 22.03.2020 and 25.03.2020 respectively as the performance of the contract required travel of persons and workmen from overseas as well as from various parts of the Country. However, the Respondent No. 1 vide its letter dated 31.03.2020 refuted the invocation of force Majeure by the Petitioner.

In this backdrop, the Petitioner under the apprehension that Respondent No.1 will terminate the said contract and consequently encash the BGs issued by Petitioner in favour of Respondent No.1, filed an Application under Section 9 of the Arbitration and Conciliation Act, 1996 seeking interim protection by way of a restraint/injunction against Respondent No.1 from invoking/encashing the eight BGs.

Per contra, the main contention put forth by Respondent No.1 was that a BG can only be stayed in cases of egregious fraud. In support of this contention, Respondent No. 1 placed its reliance on Hon'ble Supreme Court's Judgment in U.P. Cooperative Federation Ltd. Vs. Singh Consultants and Engineers Pvt. Ltd.[9] and Svenska Handelsbanken Vs. Indian Charge Chrome[10] wherein it has was held that invocation of BG can only be stayed in cases where there has been an egregious fraud. In furtherance to the aforesaid, the Respondent No.1 further contended that the Petitioner has concealed the fact that the lockdown imposed by the Central as well as the State Governments is not applicable to the Petitioner in the present case as production of petroleum is an 'essential commodity' and the same has been exempted from lockdown by various orders/notifications passed by the Government of India.

In rejoinder submissions, the Petitioner contended that it is only engaged in the business of drilling wells and the scope of work as per the contract also pertains to the same. Therefore, drilling of wells is different from production of petroleum, which in turn does not come within the ambit of 'essential commodity' and in view thereof, the same has been adversely affected due to the imposition of lockdown.

Findings of the Court

The Hon'ble High Court of Delhi while placing reliance upon Hon'ble Supreme Court's Judgment in Himadri Chemicals Industries Ltd. Vs. Coal Tar Refining Co.[11] and Standard Chartered Bank Ltd. Vs. Heavy Engineering Corporation Ltd.[12] held that in cases of 'Special Equities' and in order to prevent irreparable harm to a Party, the invocation of BGs can be stayed and the presence of egregious fraud is not the only criteria.

In view of the aforesaid, the Hon'ble High Court of Delhi opined that in the instant case, the lockdown imposed by the Government of India could not at all been anticipated by either of the parties. The Hon'ble High Court further held that it was the lockdown imposed that impeded or prevented the Petitioner from fulfilling the completion of the project by 31.03.2020. Thus, in view of the facts of the case and the unprecedented event of lockdown being imposed by the Government of India, the Hon'ble High Court of Delhi held that the lockdown imposed is a prima facie case of Force Majeure and in view thereof the court further granted ad interim injunction on the invocation of BGs until the next date of hearing on grounds of Special Equities.

III. ANALYSIS

The aforesaid Order passed by the Hon'ble High Court of Delhi would be music to the ears to parties fearing invocation of BGs in the wake of the lockdown imposed by the Government of India, especially after the recent Order passed by the Hon'ble High Court of Bombay in the Standard Retail Case wherein an injunction against encashment of LC was not granted to the Petitioner.

It is noteworthy that the Orders passed by the Delhi and the Bombay High Courts are under different facts and circumstances. However, both the orders deal with a common premise of a party seeking relief in a commercial arrangement in light of the lockdown imposed by the Government of India on account of the outbreak of the pandemic COVID-19 as a Force Majeure Event.

i. Factual Matrix of both the cases

Firstly, in the case before the Hon'ble High Court of Bombay, the Contract between the parties was already terminated.  The Petitioner therein had sought an injunction against the invocation of LC by the Bank and to avoid their Contractual Obligation owing to the Covid-19 Pandemic while relying upon Section 56 of the Indian Contract Act, 1972. Whereas, in the Halliburton case before the Hon'ble High Court of Delhi, only an ad interim relief of stay against invocation of BGs to the expiry of one week from the lifting of lockdown was sought by the Petitioner. Further in the Halliburton case it was also observed that the Petitioner was fulfilling its contractual obligations right till the imposition of lockdown which ultimately precluded the Petitioner from completing the project by 31.03.2020.

ii. Dispute and the Force Majeure Clause in the Contracts

Secondly, in the Standard Retail case, the entire dispute was with respect to payment and an injunction being sought against the invocation of LC which did not envisage a Force Majeure event. Further, the Force Majeure clause in the Contract was only available to the Seller in that case (who was based out of Korea) and the courts of Korea had the exclusive jurisdiction.

Whereas, in the Halliburton Case, there was a valid Force Majeure Clause in the Contract executed between the parties and the same was duly invoked by the Petitioner vide letters dated 18.03.2020 and 25.03.2020 issued to the Respondent No.1.

iii. Concept of 'Essential Service' and 'Special Equities'

Thirdly, in Standard Retail case, it was found that distribution of steel had been declared as an essential service by the Central as well as State Notifications. Further, it is noteworthy to mention herein that the Respondent Sellers had already performed their part of the contractual obligations. Therefore, the Hon'ble High Court of Bombay while noting the aforesaid, held that an event of Lockdown which is temporary in nature, cannot come to the benefit or rescue of the Petitioner therein so as to resile from its contractual obligations with Respondent No.1 of making payments.

However, in Halliburton Case before the Hon'ble High Court of Delhi, it was found that although production of petroleum is an essential commodity, the activities related to it, i.e. drilling of wells (which was the scope of work of the Petitioner in the contract) is not an essential commodity. The Hon'ble High Court of Delhi while examining the facts and circumstances of the case further noted that in case the lockdown had not been imposed, the contractual work could have been completed by 31.03.2020 as the Petitioner in the process of completing the project and only minimal work was left until the lockdown was imposed.

Therefore, the Hon'ble High Court of Delhi opined that the business/completion of the project had been affected by the lockdown imposed by the Government of India. In view thereof, the concept of 'special equity' was exercised by the Court in form of preventing irretrievable injustice between the parties and granted an ad interim injunction in favour of the Petitioners until the next date of hearing.

IV. CONCLUSION

In view of the above analysis it can be concluded that there is no grundnorm as yet in so far as seeking such reliefs in commercial arrangements on account of COVID-19 pandemic and the subsequent lockdown is concerned. As has been rightly observed by the Hon'ble High Court of Delhi in the Halliburton case, the outcome of each case will solely and purely depend upon the facts and circumstances to that particular case as well as the Force Majeure Clause of the Contract entered by the parties.

In view of the aforesaid, it remains to be seen how the Courts are going to interpret this unprecedented situation along with the relevant clauses of the Contract because one thing is for sure that in the coming days/weeks/months, the courts across the country are going to be flooded with disputes of similar nature.

By: Suhael Buttan

About the author:

Suhael Buttan is currently working as an associate at SKV Law Offices. He has obtained his B.B.A.LL.B (Hons.) degree from Symbiosis Law School, Noida (affiliated with the Symbiosis International University, Pune).

Over the years, he has successfully handled an array of litigations and legal matters representing the interests of corporate as well as individual clients before the Supreme Court of India, High Court of Delhi, District Courts of Delhi, Appellate Tribunal for Electricity and various other Commissions and fora across the country.

He has also advised clients in matters pertaining to Civil laws, Electricity Laws, Contractual Disputes, Consumer matters and Arbitration Laws in particular.

Vikas Maini, Co-Author

VIkas is currently working as an associate at SKV Law Offices. He has obtained his B.A. LL.B. (Hons.) degree from Guru Gobind Singh Indraprastha University ("GGSIPU"), New Delhi .

He is currently practicing in the area of commercial litigation and arbitration with special focus in the area of Infrastructure & Energy. Vikas’s expertise also extends to other branches of law including but not limited to competition law, the Insolvency and Bankruptcy Code, Consumer Protection Act, Civil Suits and Criminal Law.

  • [1] http://pibphoto.nic.in/documents/rlink/2020/mar/p202032401.pdf
  • [2] https://pib.gov.in/PressReleseDetail.aspx?PRID=1614481
  • [3] Commercial Arbitration Petition (L) No. 404 of 2020.
  • [4] O.M.P. (I) (COMM) & I.A. 3697/2020
  • [5] Section 56. Agreement to do impossible act.—An agreement to do an act impossible in itself is void. Contract to do an act afterwards becoming impossible or unlawful.—A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful. Compensation for loss through non-performance of act known to be impossible or unlawful.— Where one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such promisee sustains through the nonperformance of the promise.
  • [6] (2017) 14 SCC 80
  • [7] (1954) SCR 310
  • [8] Article 11. Force Majeure: In the event of an Act of God (including but not limited to floods, earthquake, typhoons, epidemics and other natural calamities), war or armed conflict or serious threat of the same, government order or regulation, labor dispute or any other similar cause beyond the control of 'Seller' or any of its suppliers or sub-contractors which seriously affects the ability of 'Seller' or any of its suppliers or sub-contractors to manufacture and deliver the 'Goods', 'Seller' may, at its sole discretion and upon written notice to 'Buyer' either terminate the Contract or any portion affected thereof by such event(s), or delay performance of the Contract, in whole or in part, for a reasonable period of time. Any such delay of performance by 'Seller' shall not preclude 'Seller's' later right to terminate the Contract or any portion affected thereof by such event(s). In no event shall 'Seller' be liable to 'Buyer' or to any third party for any costs or damages arising indirectly or consequentially from such non-fulfillment of or delay in the performance of all or part of the Contract'
  • Article 12. Governing Law & Arbitration: The Contract shall be governed by and construed in accordance with the Laws of Kerea/Singapore/London. All disputes, controversies or differences which may arise between the parties, out of or in relation to or in connection with the Contract, or for the breach thereof, shall be finally settled by arbitration in Seoul, Korea/Singapore/London in accordance with the Commercial Arbitration Rules of the respective Commercial Arbitration Board and under the Laws of Korea/Singapore/London. The award rendered by the arbitration shall be final and binding upon both parties concerned.'
  • [9] (1988) 1 SCC 502
  • [10] (1994) 1 SCC 502
  • [11] (2007) 8 SCC 110
  • [12] (2019) SCC Online SC1638

 

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