Covid 19 Fallout: What To Expect From Your Force Majeure Clause – Recent Guidance from Courts

For about 5 weeks starting 22 March 2020, the entire country has been under strict lock-down to prevent the spread of Covid-19. As parts of the country prepare to resume some normalcy, various businesses will face the challenge of dealing with force majeure claims. Interestingly, during this lockout some cases already reached the courts and some guidance has now become available. Not surprisingly, almost all these cases relate to urgent applications seeking injunction against invocation of bank guarantees or payment under letters of credit.

Regulatory Changes and Contingent Obligations

Amongst the 4 cases that we intend to look at in this post, a recent decision of the Supreme Court is likely to have maximum impact even though, on facts, it has nothing to do with the current Covid–19 situation. In National Agricultural Cooperative Marketing Federation of India vs. Alimenta S.A (decision dated 22 April 2020), a three judge bench of the apex court has held that a foreign award could not be enforced in India as being opposed to its public policy as the underlying contractual obligation which was found to be in breach was otherwise prohibited by export control regulations. In a decision which considers multiple aspects with respect to force majeure and frustration as well as the issue of enforceability of foreign awards – the most striking feature remains the reasoning which led to the finding that the award was against public policy and incapable of being enforced in India. The court held that the obligation of supply under the contract by its very nature was contingent on permissibility of export, making it a contingent contract under section 32 of the Indian Contract Act, 1872. If such permission was refused, the obligation to perform would be excused. The court relied on a clause in the contract as well, but also independently reasoned on the inherent nature of contract, which can have wide application to multiple situations.

A detailed critical analysis of this decision is beyond the scope of this post. What is of particular interest is that this case could impact multiple contracts in post Covid-19 situation, whether or not the governing law is Indian law. For instance, there is a high probability that it might impact contracts affected by the new FDI restrictions imposed by India on investments from certain countries. Similar restrictions or other unexpected regulatory changes could be on the cards in future as well, given the massive economic and financial impact of Covid–19. In such situations, would not new regulatory changes impacting contractual obligations be seen in similar light? By their very nature, foreign investment could be said to be contingent upon permissibility and conditionality as imposed by the sovereign. Therefore, any new regulatory change impacting the performance of obligations of one of the parties could potentially be argued to be exempted/excused under section 32 of the Indian Contract Act 1872.

No contradiction in positions taken by Delhi and Bombay High Courts

There is always a risk of oversimplifying court decisions viewed from a macro perspective – particularly in the background of an overshadowing event such as the current global lock-down. This has happened to the perception and reporting of the first few decisions on contractual issues arising out of the lock-down – two from Delhi and one from Bombay. In both decisions the Delhi High Court granted injunction whereas the Bombay High Court, in the case before it, refused any injunction against payment under a letter of credit. In all cases, the contention based on which the injunction was sought, revolved around fallout of Covid–19 and the lockout. This has led to some reports that Delhi High Court has considered the lockout to be a force majeure situation whereas the Bombay High Court has not. Such interpretation of these decisions would be entirely incorrect. In order to appreciate the distinction, a brief summary of what has been held in these cases is below.

The Bombay High Court by its order dated 8th April 2020 in Standard Retail Private Limited v. G.S Global Corporation Limited & Anr. refused to grant any ad interim reliefs to a party seeking injunction against a letter of credit. The Respondent, a Korean Company, was to supply certain steel products to the Petitioners in Mumbai. The same were duly shipped by the Respondent company. A letter of credit had been issued by the Petitioner. The contract had a force majeure clause allowing the Respondent to terminate the contract in case it was not able to manufacture or sell the goods due to various contingencies mentioned therein. Petitioner, being traders, had bought the goods to sell them to end customers. Due to the fallout of the Covid-19 lock-down, the Petitioners were not able to sell these products and claimed that the contract stood terminated due to “…frustration, impossibility, and impracticality”. It therefore sought injunction against the Respondent from receiving payments under the letter of credit. The court refused, inter alia holding that the letter of credit is an independent transaction and is not concerned with the underlying disputes. It also held that in any event, the contractual force majeure clause only gave right to the Respondent. The Petitioner could not resile from its contractual obligation by taking aid of lock-down situation as the same is temporary in nature. On facts, court also observed that there did not seem to be any restriction on movement of steel which was declared as an essential service. It noted that the lock-down was in any case temporary and cannot be used by Petitioner to resile from its contract.

The factual scenario considered by Delhi High Court in the case of M.S/ Halliburton Offshore Services INC vs. Vedanta Limited & Anr. (decision dated 20th April 2020),  was entirely different. It related to a set of contracts regarding development of certain oil blocks. Nature of work related to oil drilling, which was labour intensive. Originally the intended completion date was early 2019 to mid 2019 but admittedly work had continued until the lock-down was imposed on 22 March 2020. Whether the delay was condoned was a disputed position. The Petitioner argued that an extension was granted until 31 March 2020 and that it would have completed the works by such date if the lock-down was not imposed. It therefore sought extension for one week after the lock-down was lifted. The Respondent, however, had sought to terminate the contract for delay and invoked 5 of the 8 performance guarantees. The Delhi High Court considered the plethora of cases laying down the law on circumstances in which injunction of bank guarantee is permitted and found that the present circumstances fell under the exception of “special equities”.

The court interestingly observed that “…[t]he countrywide lock-down, which came into place on 24th March, 2020 was, in my opinion, prima facie in the nature of force majeure. Such a lock-down is unprecedented, and was incapable of having been predicted either by the respondent or by the petitioner”. The court further observed that “The imposition of the lock-down was by way of a sudden and emergent measure, of which no advance knowledge could be credited to the petitioner – or, indeed, to anyone else.” Balancing interests, the Delhi High Court allowed injunction only until one week from the end of the lock-down period.

In Ashwani Mehra, Resolution Professional of M/s Punj Lloyd Limited vs. Indian Oil Corporation Limited & Ors., Delhi High Court restrained Indian Oil Corporation from encashing bank guarantees provided by Punj Lloyd but this time, the facts were distinct and an entirely different situation. The Petitioner had obtained injunctions before NCLT with respect to various similar bank guarantees against the Respondent. Respondent had challenged these before the Delhi High Court through a writ petition, but the court directed them to file appropriate appeal before NCLAT – which had been filed and was pending. Also, before the Petitioner could move NCLT for injunction against certain other similar bank guarantees, the imposition of lock-down made such action in NCLT impossible. Therefore, the Petitioner preferred writ petitions before the Delhi High Court to seek injunctions until the matters could be taken up before the NCLT. Under these circumstances, to maintain status quo, the Delhi High Court allowed injunction against invocation of these bank guarantees.

Case Specific Consideration Essential

As can be seen from the above, all these decisions arise in different circumstances and do not in any manner suggest that different courts have taken a different approach to the fallout of Covid–19. The case before the Bombay High Court related to a party which was not prevented from completing its payment obligations in a supply contract where the supply was already made. Difficulties faced in using the supplies (for onward trade or otherwise) were not matters relating to the supply contract with the seller. Understandably, the court did not find the circumstances justifying injunction on the payment obligation under the letter of credit. On the other hand, the Delhi High Court was faced with the situation where a party which had allowed work to be continued way beyond the original intended date suddenly post lock-down sought to invoke the performance guarantees on grounds of delay. This, coupled with the reasonable stand of the petitioner that it was indeed in a position to complete works within a week, clearly justified exercising discretion under the exception of special equities.

These cases, probably the first amongst a flurry that are yet to come, establish beyond doubt that force majeure is not a blanket concept to be applied uniformly to the situation arising out of Covid–19 and each case will have to be appreciated on its specific facts. Parties must therefore seek specific advice and not rely upon generic information publicly available.

-Sumit Rai (Guest Contributor) and Lalit Munshi (Associate)

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