Gautam Mohanty* & Yasaschandra Devarakonda**
The Hon’ble High Court of Delhi [the “Court”] on 20th April 2020, in the case of M/s Halliburton Offshore Services Inc. [“Petitioner”] vs Vedanta Limited and Anr [“Respondent”], [this “Case”] delivered its Order adjudicating a petition under Section 9 of the Arbitration and Conciliation Act, 1996 [“Act, 1996”]. Notably, the aforesaid petition was filed by the Petitioner seeking interim protection by way of restraint against Respondent, thereby injuncting it from encashing the eight bank guarantees furnished by the Petitioner as part of the contract executed between the parties for the development of three petroleum fields. The Court, upon considering the existing legal jurisprudence pertaining to the circumstances and scenarios in which interim injunctions, restraining the invocation of unconditional bank guarantees could be granted ruled in favour of the Petitioner.
The present case comment begins with a brief narration about the facts of the case including a summary of the arguments advanced by both the parties. The second part of the case comment explores the limitations and exceptions on invocation of bank guarantees, and the related judicial precedence relied upon by the Court. The third and final part of the case comment thereafter deep dives into the Court’s observations in its Order and attempts to critique the judgment vis-à-vis the legislative intent of the Act, 1996.
I. Facts of the case
The genesis of the present dispute emanates from an international tender floated by the Respondent in 2018 for the integrated development of three-block fields via the building of oil wells and rigs in the State of Rajasthan. Pursuant to the bidding process, the Petitioner was awarded the contract in April 2018. The Contract executed between the Parties mandated submission of eight bank guarantees which were issued by ICICI Bank, Respondent No.2 and submitted by the Petitioner. The relevant chronology of facts which led to the present dispute is that while the project was nearing completion the project could not be completed owing to restrictions imposed by the Government of India vide its Circular dated 26.03.2020 due to Covid-19. Accordingly, the Petitioner invoked the Force Majeure Clause of the Contract.
In essence, the case of Petitioner was that it was unavoidably handicapped in performing the contract as the performance of the contract required travel of person from overseas, as well as workmen from various parts of the country. In reply, the Respondent countered the contentions of the Petitioner by arguing that the production of petroleum was an “essential commodity” and therefore was exempted from various orders relating to the restrictions imposed owing to Covid-19. Accordingly, the Petitioner with an intention to arbitrate the above dispute approached the Hon’ble Delhi High Court under Section 9 of the Act, 1996 apprehending the termination of the Contract by Respondent and subsequent invocation of the bank guarantees. During the course of the Court proceedings, the Petitioner informed the Court that Respondent had terminated the contract and had written to the Bank for invocation of the eight bank guarantees.[i]
II. Restraint on Invocation - conditions set by judicial precedence
The main bone of contention before the Hon’ble Delhi High Court was to ascertain as to whether the present case merited an injunction restraining Respondent from invoking the eight bank guarantees furnished by the Petitioner. On a thorough analysis of the legal jurisprudence pertaining to the law with respect to injunction of encashment, or invocation, of unconditional bank guarantees the Court opined that there existed three circumstances, in which unconditional bank guarantees cannot be invoked. Firstly, the presence of egregious fraud, as enunciated in Bolivinter Oil SA v. Chase Manhattan Bank[ii], wherein the concerned bank is aware that any demand for payment already made or which may be made will be fraudulent. In the above scenario, there must exist cogent evidence of fraud and the bank cannot restrain invoking the bank guarantee solely premised on the statements of the customer.
The second circumstance is irreparable or irretrievable injury which according to the Court is an elastic ground as it is often open to interpretation vis-à-vis the circumstances surrounding the case. The aforesaid ground was discussed in great detail in the case of U.P. State Sugar Corporation v. Sumac International Ltd[iii] and Himadri Chemicals Industries Ltd v. Coal Tar Refining Co[iv]. In U. P. State Sugar Corporation v. Sumac International Ltd[v]the Hon’ble Supreme Court of India while relying on Svenska Handelsbanken v. Indian Charge Chrome[vi] and Itek Corporation v. First National Bank of Boston[vii] observed as below:
14. On the question of irretrievable injury which is the second exception to the rule against granting of injunctions when unconditional bank guarantees are sought to be realised the court said in the above case that the irretrievable injury must be of the kind which was the subject-matter of the decision in the Itek Corpn. case [566 Fed Supp 1210]. In that case an exporter in USA entered into an agreement with the Imperial Government of Iran and sought an order terminating its liability on stand by letters of credit issued by an American Bank in favour of an Iranian Bank as part of the contract. The relief was sought on account of the situation created after the Iranian revolution when the American Government cancelled the export licences in relation to Iran and the Iranian Government had forcibly taken 52 American citizens as hostages. The US Government had blocked all Iranian assets under the jurisdiction of United States and had cancelled the export contract. The Court upheld the contention of the exporter that any claim for damages against the purchaser if decreed by the American Courts would not be executable in Iran under these circumstances and realisation of the bank guarantee/letters of credit would cause irreparable harm to the plaintiff. This contention was upheld. To avail of this exception, therefore, exceptional circumstances which make it impossible for the guarantor to reimburse himself if he ultimately succeeds, will have to be decisively established. Clearly, a mere apprehension that the other party will not be able to pay, is not enough. In Itek case [566 Fed Supp 1210] there was a certainty on this issue. Secondly, there was good reason, in that case for the Court to be prima facie satisfied that the guarantors i.e. the bank and its customer would be found entitled to receive the amount paid under the guarantee.
The above view was reiterated in the case of Himadri Chemicals Industries Ltd v. Coal Tar Refining Co[viii] wherein the Apex Court summarised the six principles, governing injunction of invocation of unconditional bank guarantees.[ix]
The third circumstance is the existence of special equities which was propounded in the case of U. P. Cooperative Federation Ltd v. Singh Consultants and Engineers (P) Ltd[x] wherein the Hon’ble Supreme Court of India observed that “in order to restrain the operation either of irrevocable letter of credit of confirmed letter of credit or bank guarantee, there should be serious dispute and there should be good prima facie case of fraud and special equities in the form of preventing irretrievable injustice between the parties.”
Succinctly stated, the law regarding the invocation of bank guarantees has been recently summarised and clarified in the case of Standard Chartered Bank Ltd v. Heavy Engineering Corporation Ltd.[xi] wherein the Apex Court has stated as below:
The settled position in law that emerges from the precedents of this Court is that the bank guarantee is an independent contract between bank and the beneficiary, and the bank is always obliged to honour its guarantee as long as it is an unconditional and irrevocable one. The dispute between the beneficiary and the party at whose instance the bank has given the guarantee is immaterial and is of no consequence. There are, however, exceptions to this Rule when there is a clear case of fraud, irretrievable injustice or special equities. The Court ordinarily should not interfere with the invocation or encashment of the bank guarantee so long as the invocation is in terms of the bank guarantee.
III. The factual implications of the legal jurisprudence on the case
In light of the above legal exposition, the Hon'ble Delhi High Court at the outset clarified that the Petitioner in the present case cannot plead fraud as a ground to seek injunction as the conditions for the application of the ground of fraud were clearly not met in the present case. Accordingly, as per the Court, the only condition that was required to be tested was whether irretrievable justice or special equities existed which justified the grant of injunction as prayed for by the Petitioner. To that extent, the Court observed that the country-wide lockdown imposed on 24.03.2020 was a force majeure event as the same was unprecedented and incapable of being predicted by either party. Further, the Court taking a prima facie view remarked that in the present case, special equities did exist which justified the grant of injunction till the expiry of a period of one week from 03.05.2020 i.e., the date until which lockdown was imposed. Notably, the Court opined that the circumstances of the present case where the Respondent has terminated the contract and written to the Bank for invocation of the eight bank guarantees merit the grant of injunction as otherwise allowing the bank guarantees to be encashed while the lockdown is in place would cause irreparable harm and prejudice to the Petitioner.
In the last limb of its analysis, the Court stated that even though it was no doubt true that petroleum was an essential commodity, and the production of petroleum was exempted from the rigours of the lockdown, it could not be said that the Petitioner was engaged in the production of petroleum. According to the Court, the Petitioner was engaged in the drilling of petroleum wells which did not stricto sensu qualify within the ambit of production of petroleum and thus, the completion of the project was in fact impeded as a result of the imposition of the lockdown.
IV. Pushing the limits, punishing the legislation
In principle, the Order of the Hon’ble Delhi High Court must be hailed in all its fairness for empathising with COVID hit contractual obligations and non-performance of Contract. However, there are three aspects of the Order that are particularly noteworthy.
(1) Firstly, the Court in its Order in paragraph 20 noted:
“Prima facie, in my view, special equities do exist, as would justify grant of the prayer, of the petitioner, to injunct the respondent from invoking the bank guarantees of the petitioner, forming subject matter of these proceedings, till the expiry of a period of one week from 3rd May 2020, till which date the lockdown has been imposed.”
The Court resorted to justifying the injunction on the ground of the existence of special equities. However, the Court failed to highlight the exact contours of the special equities existing in the present case thereby leaving ample of room for a wide interpretation. Further, to the extent of the reliance placed by the Hon’ble Supreme Court of India on the ratio decidendi of the cases of Svenska[xii] and Itek Corporation[xiii], it can be argued that the Hon’ble Delhi High Court erred in the application of the Itek Corporation test i.e., ascertaining irretrievable injury/irreparable harm. Pertinently, the test as postulated in the case of Itek Corporation v. First National Bank of Boston[xiv] is as below:
Because I find that Itek has demonstrated that it has no adequate remedy at law, and because I find that the allegations of irreparable harm are not speculative, but genuine and immediate, I am satisfied that Itek will suffer irreparable harm if the requested relief is not granted.
It culminates from the above that while the harm envisaged was real and genuine, there existed alternative remedies in law for the Petitioner - namely, the arbitration proceedings via which a favourable interim order restraining the invoking of bank guarantees or even a final award could be obtained at a later stage. The only distinction between the two limbs of irreparable harm or injury and special equities is the existence of an alternative remedy in law since the absence of a remedy in law is what prompts common law jurisprudence to find a remedy in equity.
The second aspect of the judgment that merits attention is the judicial precedence relied upon by the Court vis-à-vis Order XXXIX of the Code of Civil Procedure, 1908 [“CPC”]. Under the O. XXXIX of CPC, a temporary injunction can be granted if: (1) there exists a prima facie case and the balance of convenience is in favour of the petitioner or against the respondent, (2) if there is irreparable injury likely to be caused to the petitioner which cannot be compensated in money, and (3) there is a bona fide dispute raised. The courts in Himadri Chemicals Industries Ltd v. Coal Tar Refining Co., U. P. State Sugar Corporation v. Sumac International Ltd, and Svenska Handelsbanken v. Indian Charge Chrome, ruled in favour of injunction after having conducted the tests of O. XXXIX of CPC for temporary injunction. In the present case, the Court, in its order, failed to follow the procedure laid down in O. XXXIX of CPC before granting the interim injunction against the invocation of bank guarantee. No analysis was undertaken to investigate if there was a prima facie case and balance of convenience in favour of the Petitioner. Even if an argument were to be made, that the order was merely passed as an immediate remedy for the Petitioner, pending a final judgment from the Court, which likely might include an analysis of the tests under O. XXXIX of CPC, such an outcome is undesirable as per the scheme of the 1996 Act.
Thirdly, Section 9 of the Act, 1996 has been at the forefront of polarised debates about the extent of judicial interference in the arbitral procedure. Under Section 9 of the Act, 1996, an interim relief under Section 9 can be filed before, during or after the completion of arbitral proceedings before the award is enforced. After the 2015 Amendment to Section 9, petitions during the arbitral proceedings are limited to instances only when Section 17 interim reliefs provided by the tribunal are not efficacious. To a large extent, the 2015 amendment arrested judicial interference during the arbitration process. The conundrum, however, continues to exist in a pre-arbitration stage, where courts analyse cases on merits to determine whether interim injunctions could be granted. For example, the Hon’ble Delhi High Court in the present case indulged in the exercise of ascertaining the merits of the extension of time issue which was unwarranted as the same could have serious implications on the subsequent arbitral process as in all likelihood the Petitioner will place reliance on this particular observation of the Court while arguing its case. Such analysis can seriously jeopardise the consequent arbitration proceedings due to a potential inherent bias that may creep into the minds of the tribunal owing to the existence of a favourable injunction order. Courts must therefore refrain from analysing Section 9 petitions on merits of the case, which unfortunately is an inevitable outcome before the determination of whether injunctive relief can be granted or not.
V. Key takeaways
In principle, the injunction on the invocation of the bank guarantees was an appropriate remedy in the given context. However, the fact that there was no analysis on the requirements of an interim injunction under CPC is a major lacuna of the judgment. The relief of injunctions are a useful tool under section 17 of the Act, 1996 under which the tribunals are empowered to provide the relief. Since tribunals are not bound by the procedures of CPC as per Section 19 (1) of the 1996 Act, interim injunctions as a relief are most appropriate at a Section 17 application stage. In this case, by way of example, an interlocutory order to maintain the status quo as against an interim injunction to restrain invocation of bank guarantees would have solved the riddle. Alternatively, the advent of emergency arbitrations in India as an interim relief under Section 17 of the Act, 1996 could be a recourse as well. The failure or the non-efficaciousness of this remedy however would lead to a Section 9 (1) petition under Section 9 (3) of the 1996 Act, a situation which is bereft of any certainty at least insofar as foreign seated emergency arbitrations are concerned. At the end of the day, the only reliable recourse that appears to exist is a Section 9 petition which is seemingly inseparable with the Court’s unfortunate intervention and judicial overreach via a substantive analysis on the merits of the case.
*Gautam Mohanty is currently a doctoral student at Kozminski University, Warsaw, Poland. He is also an advocate enrolled at the bar in India and an Assistant Professor (on leave) at Jindal Global Law School India (JGLS) and an arbitration consultant with Arbitrator Justice Deepak Verma, Former Judge of Supreme Court of India. He can be reached at email@example.com.
**Yasaschandra Devarakonda is a final year law student pursuing a five-year integrated undergraduate B.A. LL.B course from National Law University Odisha, India. He can be reached at: firstname.lastname@example.org.
[i] Halliburton Offshore Services Inc. v. Vedanta Limited and Anr., p 21. [ii] Bolivinter Oil SA v. Chase Manhattan Bank (1984) 1 All ER 351. [iii] U. P. State Sugar Corporation v. Sumac International Ltd (1997) 1 SCC 568. [iv] Himadri Chemicals Industries Ltd v. Coal Tar Refining Cov (2007) 8 SCC 110. [v] ibid (n iii). [vi] Svenska Handelsbanken v. Indian Charge Chrome (1994) 1 SCC 502. [vii] Itek Corporation v. First National Bank of Boston 566 Fed Supp 1210. [viii] ibid (n iv). [ix] ibid (n i) p15. [x] U. P. Cooperative Federation Ltd v. Singh Consultants and Engineers (P) Ltd, (1988) 1 SCC 174. [xi] Standard Chartered Bank Ltd v. Heavy Engineering Corporation Ltd., 2019 SCC Online SC 1638. [xii] ibid (n vi). [xiii] ibid (n vii) [xiv] ibid.