Halliburton Offshore Services Inc v Vedanta Ltd (2020)

This is the first widely read Indian decision on whether the COVID-19 lockdown excused performance of a commercial contract, and its answer is a careful no on these facts. It does two things an examiner will test.

First, it accepts without argument that the pandemic is a force majeure event within a clause that covers epidemics: there is "no doubt that COVID-19 is a Force Majeure event." Second, it immediately puts the real question: "But was this event the cause of the non-performance?" A party already in breach for months before the event cannot shelter behind it.

It is also a convenient place to find the principles of Energy Watchdog v Central Electricity Regulatory Commission, which the judgment sets out as a numbered list; those propositions, not this Court's own, are the binding statement of Indian law on ss. 32 and 56.

Note the stage of proceedings. This is an order on interim relief in a petition under s. 9 of the Arbitration Act, and the Court said so expressly at the end: "the opinion rendered herein is prima facie in nature and shall not bind the arbitral proceedings in any manner whatsoever."

A production sharing contract of 15 May 1995 covered the Rajasthan Block RJ-ON-90/1, which produces a substantial portion of the petroleum in India. To operationalise production, the company floated a global tender for end-to-end integrated oil well construction and enhanced oil recovery across three fields — Mangala, Bhagyam and Aishwarya, the "MBA fields".

The petitioner contractor, a group company of an American oilfield services firm, won the bidding, and a contract was executed on 25 April 2018 with a total value of USD 197 million. The contract ran to almost 1,000 pages with exhibits and annexures.

The work fell behind. The company served repeated notices. Projected completion dates were proposed by the contractor and not met. Finally the parties agreed that the entire work would be concluded by 31 March 2020.

On 18 March 2020 the contractor invoked the force majeure clause and sought further time, on the ground that because of the COVID-19 outbreak experts from France who might be required could not travel to India. The company did not accept this and on 31 March and again on 7 April 2020 invoked the termination clause and threatened to encash the bank guarantees — nine in all, in three sets: advance, financial and performance guarantees.

The contractor filed a petition under s. 9 on 13 April 2020 to restrain encashment; the company terminated the contract the same day. A single judge granted an ad-interim injunction on 20 April 2020, restraining encashment for a limited period, expressly on the prima facie footing that the contractor had been working on the project until the sudden imposition of the lockdown on 22 March 2020 "or at least shortly prior thereto". That order came up for final consideration once pleadings were complete.

Clause 15 excused a party "whose performance is prevented, hindered or delayed by the occurrence of an event of Force Majeure" which had given notice within five business days, for so long as the event continued and to the extent performance was prevented, hindered or delayed. Clause 15.3 imposed a duty to mitigate: the affected party "will use all reasonable efforts to mitigate the affect thereof upon its or their performance of this Agreement and to fulfil its or their obligations under this Agreement."

The definition in clause 15.4 covered events beyond a party's reasonable control, including natural events and specifically "epidemic or plague". It expressly excluded, among other things, "unavailability late delivery or changes in cost of machinery, equipment, materials, spare parts or consumables", prevailing weather conditions, and "failure or delay in performance by any Subcontractor".

The Court read the clause and framed the issue: performance would be excused if the contractor were "prevented or hindered or delayed by any natural event including a pandemic or plague", and "The question is whether the Contractor, in this case, was prevented, hindered or delayed by COVID-19 in the punctual performance of its obligations."

The judgment records that "The law relating to Force Majeure has been recently settled by the Supreme Court in the case of Energy Watchdog v. Central Electricity Regulatory Commission, (2017) 14 SCC 80." and lists the principles drawn from paragraphs 34 to 42 of that judgment. They are worth learning as a block:

• "Force Majeure would operate as part of a contract as a contingency under section 32 of the Indian Contract Act 1872"; independent of the contract, "the doctrine of frustration could be invoked by a party as per Section 56, ICA."
• "The impossibility of performance under Section 56, ICA would include impracticability or uselessness keeping in mind the object of the contract."
• "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."
• "Express terms of a contract cannot be ignored on a vague plea of equity." "Risks associated with a contract would have to be borne by the parties."
• "Performance is not discharged simply if it becomes onerous between the parties." "Alteration of circumstances does not lead to frustration of a contract." "A mere rise in cost or expense does not lead to frustration."
• "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."
• "If there is an alternative mode of performance, the Force Majeure clause will not apply."
• "The terms of the contract, its matrix or context, the knowledge, expectation, assumptions and the nature of the supervening events have to be considered." "If the Contract inherently has risk associated with it, the doctrine of frustration is not to be likely invoked."
• "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."

Having stated the law, the judge set out the approach a court must take to a pandemic plea. It is the most quotable part of the judgment.

"The question as to whether COVID-19 would justify non-performance or breach of a contract has to be examined on the facts and circumstances of each case. Every breach or non-performance cannot be justified or excused merely on the invocation of COVID-19 as a Force Majeure condition." The court must "assess the conduct of the parties prior to the outbreak, the deadlines that were imposed in the contract, the steps that were to be taken, the various compliances that were required to be made and only then assess as to whether, genuinely, a party was prevented or is able to justify its non- performance due to the epidemic/pandemic."

And on construction: "It is the 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." Following Energy Watchdog, "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 timeline was decisive and is worth reproducing in an answer.

The contractor "was in breach in September, 2019 itself." The company issued a notice on 25 November 2019 calling for a cure plan; it could have terminated then, but instead called for the plan while reserving its rights. Under that plan the contractor promised staggered completion — Aishwarya by 31 January 2020, Bhagyam by 29 February 2020, Mangala by 31 March 2020 — and did not adhere even to those dates. The judge noted pointedly: "At that time i.e. by 29 th February, 2020, there was no lockdown in India. The graphs and the tabulated chart clearly show that there was no progress in the Project."

The final agreed date was 31 March 2020. The lockdown came into effect in late March. "Even going by the 31st March, 2020 agreed deadline, the works of all the three oil fields ought to have been almost complete as the invocation of the Force Majeure clause was merely 12 days before the deadline, on 18th March, 2020."

There had been "hardly any work done in the months of November 2019, December 2019, January 2020, February 2020 and March 2020. There was clear non-performance and lack of alacrity in completing the work".

The Court also observed that the clause had been invoked only on 18 March 2020 and not earlier, from which it followed that "the Contractor did not itself feel that COVID-19 had, previously, hindered the performance of its contract." On the mitigation obligation the record was empty: "there is nothing on record to show as to what steps the Contractor took toward mitigation, which was necessary as per the Force Majeure clause."

The conclusion is the sentence to remember: "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 contractor argued in rejoinder that a variation order had extended the contract to 30 June 2020. The Court found this "a wholly new case alien to the pleadings of the parties" unmentioned in the petition, the reply or the correspondence, and not even taken in the reply to the letter of termination. It held it "highly improbable to believe that if the parties had consensus ad-idem on the extension of such a contract till 30th June, 2020 an agreement in writing would not have been executed" and concluded that "there is no novation in the present case" while leaving the interpretation and effect of the variation order to the arbitral tribunal.

The force majeure plea did not, at this stage, protect the contractor: "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." Whether the clause ultimately applies is for the arbitral tribunal.

"Thus, insofar as the invocation of three sets of Bank Guarantees are concerned, no case is made out for passing of any interim order staying the invocation or encashment thereof." The ad-interim order of 20 April 2020 was vacated, that order having been passed before the pleadings and the relevant correspondence were complete.

One protective direction was given. Because reconciliation of accounts was needed to fix what part of the advance bank guarantees the company was entitled to retain, the Court directed that the encashed proceeds of the advance guarantees be placed in a joint account held by both parties, that the accounts be reconciled within two weeks, that the company's entitled portion then be released to it and the balance to the contractor, and that failing agreement the parties might approach the arbitral tribunal under s. 17.

The Court closed by recording that its opinion was prima facie and would not bind the arbitral proceedings.