Can force majeure apply against enforcement of bank guarantees? The Delhi High Court’s analysis

by | Dec 14, 2020

Halliburton Offshore Services Incorporated (Petitioner) and Vedanta Limited (Respondent) had entered into a contract for the development of three oilfields. The Petitioner had undertaken to complete the drilling of the oil wells by 31 March 2020. However, on 22 March 2020, the Petitioner sought an extension of the timeline, citing the Covid-19 pandemic and the resultant lockdown imposed by the government of Rajasthan from 22 March to 31 March 2020, which was subsequently extended throughout India. The Respondent rejected the Petitioner’s argument and sought to invoke the bank guarantees given by the Petitioner for breach of contract. The Petitioner approached the Delhi High Court (Delhi HC) seeking an injunction against the invocation of the bank guarantees.

The Respondent argued:

  • that an invocation of a bank guarantee is a separate matter and is not affected by any disputes that may arise out of the non-performance of any obligation by either party;
  • that a court can issue an injunction only on the invocation of a bank guarantee in circumstances where the bank fulfilling the guarantee is aware of an egregious fraud being committed on account of paying under the bank guarantee; and
  • that the Petitioner was merely using force majeure as an excuse after failing to adhere to the deadlines of the project.

The Petitioner argued:

  • that the Respondent had agreed to 31 March 2020 as the deadline for completing the work, and that a very small part of the work was still pending on 22 March 2020;
  • that an injunction on the invocation of bank guarantees can be sought on the ground of special equity to prevent irreparable damage to the debtor;
  • that the Petitioner would suffer irreparable harm if the bank guarantees were invoked; and
  • that the timeframe of the injunction on the invocation of the bank guarantees was very limited (only until one week after the lockdown was lifted by the Rajasthan government).

A big part of adjusting to the new normal in the context of commercial contracts is understanding the operation of force majeure clauses.

This update by Akil Hirani, Managing Partner at Majmudar & Partners explains whether force majeure applies against enforcement of bank guarantees based on the case of Halliburton Offshore Services Incorporated v. Vedanta Limited. The update has been published by the International Bar Association

Read the full update here.

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