Rejecting concerns of COVID-19 lockdown, the Delhi High Court in the matter of Indrajit Power Pvt Limited vs Union of India & Ors on April 28,20201 ("Order") dismissed a petition filed by a thermal and green power company (Indrajit Power Pvt Ltd) seeking a direction to refrain the Central Government from invoking the bank guarantee in connection with a mining project in Maharashtra.

Brief Facts

Indrajit Power had inter-alia moved the Delhi High court thereby seeking following reliefs:

  • Directing Central Government, from appropriating the bank guarantee which was given to them for an amount of over Rs 30 crores pursuant to a mining auction;
  • Extension of time to complete the pending project after renewal of the bank guarantee above and
  • Seeking to quash an email of April 4, 2020 which was sent to Indrajit, where the Central Government conveyed its decision to appropriate the bank guarantee in its favour.

The guarantee which was being invoked by the Government was on account of Indrajit's failure to comply with parameters laid down in the Coal Mine Development and Production Agreement ("Agreement"), before the mining operation begins.

Indrajit's broad arguments before the Court were (i) company's power plant was closed down because of lockdown thereby having no immediate source of revenue; (ii) invocation of the bank guarantee was unfair and inequitable and also barred in view of the prevailing situation of COVID-19 pandemic and the stipulation of Force Majeure shall apply and (iii) as such due to non-payments Indrajit shall be pushed into default and effectively towards being declared as NPA.

The Central Government, on the other hand, broadly argued that despite an extension of twelve months granted to Indrajit under the Agreement to meet their parameters, Indrajit had failed to complete their milestones and were in default, since April-June 2018. Further, it was argued that the bank guarantee invocation decision was taken after due compliance of natural justice and under the provisions of Agreement. The bank guarantee being unconditional and irrevocable there could be no fetters upon encashment of the same, unless in exceptional cases of irretrievable injustice or fraud which was absent in the present case.

The Court's Order was mainly passed on the premise that various lockdown orders which were passed by various courts in India and relied upon by Indrajit, were not applicable to the present case for the reason that the lockdown came into force with effect from March 24,2020 and inspite of an extension of twelve months given by the Government, Indrajit could not fulfil its obligations and continued to be in default. Merely because the invocation would cause financial distress, it could not be a ground of stay, exception being of irrevocable injury which was absent in the present case.

Our View:

Contrary to above ruling, the Delhi High Court's vide its ad-interim order in Halliburton Offshore Services Inc vs Vedanta & Anr2 had restrained the invocation of bank guarantees given by Halliburton to Vedanta on premise of special equities, irretrievable harm and prima facie finding that lockdown is in the nature of a force majeure.

The above ruling of Indrajit seems to concur the view of the Hon'ble Bombay High Court's recent matter of Standard Retail Pvt. Ltd. V/s M/s. G. S. Global Corp & Ors3 , where Court had refused to grant force majeure exemption to a set of steel importers, who had sought to restrain the encashment of their Letter of Credits by Korea-based exporters.

The Order in our view seems to suggest that the defence of force majeure, vis-a vis Covid-19 cannot be taken in every case and will depend on the wordings of such clauses in the contract; party's inability to perform the contract during Covid-19 is also of importance.

The presence of special equities, irretrievable harm/ irrevocable injury should be present and temporariness of Covid-19 may suggest that courts may not treat this pandemic as a frustrating event, permitting parties to wriggle out of their contracts.

The non sequitur to the above which is an interesting question too is that what will happen in situations where a contract does not provide for a force majeure clause? A party in that case may consider invoking the certain other provisions like section 32 (enforcement of contracts contingent on an event happening) and section 56 (Agreement to do impossible act) of the Contract Act, 1872 as the case may be.

The party claiming such reliefs would have to show that Covid-19, has changed the circumstances so drastically as to defeat the very foundation of the agreement, rendering virtually impossible to perform the obligations.

To sum up the above following brief points/actions a party may take during Covid- 19 under their commercial contracts: -

  • Analyse the underlying object of the contract coupled with obligations under force majeure clauses;
  • Determine the temporariness of Covid-19 in a particular contract;
  • Serving a communication to the other party in a contract, whereby informing the counter party the suspension of performance under a Force Majeure clause in a contract and
  • various steps undertaken to mitigate the impact of the Covid-19 outbreak which has affected its ability to perform its obligations under the contract.

Footnotes

1 W.P.(C) 2957/2020 & CM Nos.10268-70/2020

2 O.M.P. (I) (COMM) & I.A. 3697/2020

3 COMMERCIAL ARBITRATION PETITION (L) NO. 404 OF 2020.

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