2020 (5) TMI 742 - HC - Indian Laws

Breach of contractual obligations - Whether COVID-19 can provide succour to a party in breach of contractual obligations? - Whether the invocation of the Bank Guarantees is liable to be injuncted on the ground of occurrence of a force majeure event i.e., COVID-19, if the breach occurred prior to the said outbreak? Breach of contractual obligations - HELD THAT - 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 would have to 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 nonperformance due to the epidemic/pandemic - 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. In response to the Force Majeure argument of the Contractor, the Company s stand is that activity related to petroleum projects were exempted as per the letter of DGH Hydrocarbon dated 26th March, 2020. The Contractor s stand is that only petroleum production is exempted and not other construction/ project completion activity. However, 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 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 nonperformance of a contract for which the deadlines were much before the outbreak itself. Invocation of Bank Guarantee - HELD THAT - As far as the Advance Bank Guarantees are concerned, a perusal of Clause 9.2(f) shows that upon termination, the Company would be entitled to draw upon the advance payment bond in the amount of the unrecovered portion of the advance payment. The unrecovered portion is not yet determined. The invocation letters simply state that the amounts of the advance Bank Guarantees are unrecovered. A perusal of the petition shows that as per paragraph 3.23, it is the case of the contractor that approximately 6.6 million dollars has already been invoiced and is yet to be paid by the company - The Contractor has clearly defaulted in performance despite repeated opportunities by the Company. The Bank Guarantees are unconditional and irrevocable. All the Bank Guarantees are valid. The language of the financial and performance Bank Guarantees makes it clear that simply on demand, the bank would have to make payment. At the time when the ad-interim order was passed by the ld. Single Judge the pleadings between the parties were not complete. In fact, most of the relevant correspondence was not filed by the Contractor and has now come on record by way of the reply and the rejoinder and further submissions filed by the parties. Thus, the submission on behalf of the Contractor that the ad-interim order ought to be continued is not tenable. The said order being ad-interim in nature, was prior to pleadings between the parties and does not deserve to be continued in favour of the Contractor - 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. However, reconciliation of accounts would be required to determine as to what would be the component of the Advance Bank Guarantees recoverable by the Company. There are no pleadings as to what exactly is the amount recoverable. Accordingly, insofar as the Advance Bank Guarantees are concerned, this Court is of the opinion that the amount recoverable by the Company ought to be ascertained. Accordingly, it is directed that the amount of only the Advance Bank Guarantees which have been invoked, upon being encashed, shall be placed in a separate Joint Account which shall be jointly held by the Contractor and the Company. The ad-interim order dated 20th April, 2020 (as modified on 24th April 2020), stands vacated in the above terms. The present petition and all pending applications are disposed of.

Summary

Issues Involved:

1. Termination of the contract.
2. Invocation of the Force Majeure clause.
3. Invocation and encashment of Bank Guarantees.
4. Completion and delays in the project.
5. Reconciliation of accounts and payments.

Issue-wise Detailed Analysis:

1. Termination of the Contract:
The contract dated 25th April 2018 between the Company and the Contractor was terminated by the Company on 13th April 2020. The termination was based on the Contractor's failure to complete the project within the stipulated timelines, despite repeated notices and opportunities to cure the breaches. The Company cited inordinate delays and non-performance by the Contractor as the primary reasons for termination. The Contractor, however, argued that the termination was illegal and malicious, attributing delays to the Company's actions and the impact of the COVID-19 pandemic.

2. Invocation of the Force Majeure Clause:
The Contractor invoked the Force Majeure clause on 18th March 2020, citing the COVID-19 pandemic as the reason for delays in project completion. The Force Majeure clause in the contract covers epidemics and pandemics, excusing performance if hindered by such events. However, the Court found that the Contractor was already in breach of the contract before the COVID-19 outbreak. The Contractor's performance had been delayed since September 2019, and the pandemic did not justify the non-performance. The Court emphasized that Force Majeure cannot provide succour to a party already in breach of contractual obligations.

3. Invocation and Encashment of Bank Guarantees:
The Company invoked the Bank Guarantees on 13th April 2020, following the termination of the contract. The Contractor sought to restrain the invocation, arguing that the guarantees should not be encashed due to the Force Majeure event. The Court, however, held that the Bank Guarantees were unconditional and irrevocable, and their invocation was justified based on the Contractor's breach. The law relating to Bank Guarantees is clear that they must be honoured unless there is egregious fraud or special equities, neither of which was established in this case.

4. Completion and Delays in the Project:
The project involved the development of three fields - Mangala, Bhagyam, and Aishwarya - with specific milestones and completion dates. The Contractor failed to meet the original completion dates of January, March, and June 2019 for the respective fields. Despite multiple revised milestones and progress reports, the Contractor did not achieve the agreed deadlines. The Court noted that there was hardly any work done in the months leading up to the invocation of the Force Majeure clause, indicating a lack of progress and non-performance.

5. Reconciliation of Accounts and Payments:
The Contractor claimed that a substantial portion of the project was completed, and it was owed significant amounts for unpaid invoices and variations. The Court directed that the amount of the Advance Bank Guarantees, upon encashment, be placed in a separate joint account held by both parties. The parties were instructed to reconcile accounts within two weeks to determine the unrecovered portion of the advance payment. Any disputes regarding the reconciliation could be referred to the Arbitral Tribunal.

Conclusion:
The Court vacated the ad-interim order restraining the invocation of the Bank Guarantees and directed the amounts to be placed in a joint account for reconciliation. The judgment emphasized the importance of adhering to contractual terms and held that the Contractor's past non-performance could not be excused by the COVID-19 pandemic. The respective claims and counterclaims of the parties were left to be adjudicated by the Arbitral Tribunal.