Shourav Lahiri revisits the case of Halliburton v Vedanta where a differently constituted bench of the Delhi High Court has just reversed its previous decision and discharged its injunction against the call on performance bonds. This update also examines some related issues that could arise as a consequence of COVID-19.
As foreshadowed in my earlier piece ‘Halliburton v Vedanta: Performance bonds and COVID-19′ the Delhi High Court’s ad-interim injunction in the matter of Halliburton v Vedanta was subject to a fuller hearing on 15 May 2020. A differently constituted bench of the Delhi High Court has, by way of a judgment dated 29 May 2020, vacated the ad-interim injunction, thereby allowing Vedanta to collect payment under the various bank guarantees invoked.
The natural order has been restored.
As discussed in the previous article, the Delhi High Court’s earlier judgment granting the ad-interim injunction raised some troubling issues, particularly regarding the ground of ‘special equities’ on which the Court relied in granting the injunction. It seemed that the Court may have been swayed by Halliburton’s invocation of COVID-19 as amounting to some sort of ‘special equities’ prompting it to restrain the calls on the bonds in order to avoid some unfairness to Halliburton. It is not clear from the judgment whether the grounds of fraud or irretrievable injustice were argued; one would assume not, as there is no discussion in the judgment on those concepts.
The earlier judgment of the Court had caused some unease amongst practitioners in India, many of whom wrote in to add to the chorus of disquiet that the jurisprudence in relation to calls on bonds was straying away from precedent. The Court’s latest judgment should put those fears to rest.
While the Delhi High Court’s latest judgment does not make new law (given that the outcome is what would have been expected under the existing law), it does illustrate three concepts which could be important as the construction industry worldwide unpicks the impact of COVID-19 on contractual obligations.
First, the invocation of COVID-19 as a force majeure event is not a silver bullet to avoid one’s obligations. As the Court’s analysis of the events show, Halliburton had fallen behind timely completion obligations far in advance of it being subject to the constraints brought about by COVID-19. While one can accept that the travel restrictions would have exacerbated the situation, in order for COVID-19 to properly be the basis for relief, a party will have to show that its inability to perform was caused by the COVID-19 related measures (and that it could not avoid such impact despite having used reasonable efforts in mitigation). This could, of course, raise issues of dominant cause, concurrency, preparedness and ability to progress at time of impact, and other related concepts that one comes across in construction cases. No doubt these will be fiercely argued in the arbitration between Halliburton and Vedanta that will follow.
Secondly, and related to the first point, because COVID-19 is not a get-out-of-jail card that would excuse all defaults, a party will remain liable for the consequences of its pre-COVID-19 defaults (unless, perhaps, the pandemic can be construed to have frustrated the contract altogether). As counsel for Vedanta pointed out in his arguments before the reconstituted bench, it is not inconsistent in law for Vedanta to have required continued performance from Halliburton despite Halliburton’s earlier breaches (of failing to complete on time) and yet to require Halliburton to pay damages for those breaches (in the form of liquidated damages), and therefore to call on the bonds securing the payment of those liquidated damages should those damages not be paid. Now that the contract has been terminated (it was terminated by Vedanta on the same night as Halliburton moved the court to injunct the invocation of the bonds), the liquidated damages will cease to accrue, but any rights that Vedanta may have had to liquidated damages that accrued pre-termination will remain extant (subject to any arguments that may arise should a view to the contrary be taken by the English Supreme Court when it decides the forthcoming appeal in the case of Triple Point Technology v PTT).
Thirdly, there was no contention in this case of irretrievable injustice presumably because Vedanta is good for the money. But not every beneficiary of a bond will be in the same position. On a daily basis we see media reports suggesting that the COVID-19 pandemic has impacted the solvency of several companies. We have (I have) seen how, during the last financial crisis some ten-odd years ago, owners used bonds as cashflow for their own business needs regardless of whether there was any good reason to have invoked those bonds. Where the contractors were able to get to the courts in time, the courts stepped in to prevent this injustice; but it was not always possible for contractors to predict a call and take out an injunction application in advance of a call, or to mobilise themselves to get to court in time post a call (in most civil law countries, one would have to wait until after the call had been made before an application for an injunction (called a precautionary attachment) could be made). I remember receiving notifications of many bond calls in the afternoon of the last day of the week. These bond calls may well have been timed to cripple the ability of the procurer of the bond to get an injunction before the bondsman, in keeping with comity and practice, would pay out pursuant to the call. While it is said that unconditional bank guarantees “are as good as cash”, they are not cash. As Chan Sek Keong CJ observed in the Singapore Court of Appeal decision in JBE Properties Pte Ltd v Gammon Pte Ltd  SGCA 46 (at ), the pricing of a bid could be quite different had the owner required contractors to provide a cash deposit as opposed to a bond (which is usually a line of credit provided by a bank either secured on some assets or unsecured but for a fee). This is why the law allows calls on bonds to be restrained on certain grounds, such as fraud.
Since arbitration has now commenced between Halliburton and Vedanta, the issue as regards the call on the bonds will likely now leave the courts and become another of the matters to be resolved in the arbitration. But Halliburton’s application, and the two contrasting decisions of the Delhi High Court, have given owners, contractors and their advisors something to reflect on in relation to the impact of COVID-19 on construction contracts and their performance.
This article also appeared in leading Indian legal news site Bar & Bench.