The Halliburton Case: Delhi High Court Reopens the Debate over Encashment of Bank Guarantee
[Ajay Sharma and Nikhil Gupta are students at National University of Advanced Legal Studies, Kochi.]
In M/s Halliburton Offshore Services Inc. v. Vedanta Limited (Halliburton), a single judge of the Delhi High Court passed an ad-interim injunction order, restraining Vedanta Ltd. (Respondent) from the invocation and encashment of bank guarantees which were furnished by Halliburton Offshore Service Inc (Petitioner). While passing the order, the court observed that the country-wide lockdown, which came into effect from 24 March 2020 was prima facie in the nature of force majeure event. In addition to that, it also observed that the unprecedented lockdown due to COVID-19 creates special equities in the present case and if the bank guarantees are allowed to be invoked during the lockdown, irretrievable injury and prejudice would be caused to the Petitioner. Thus, the court restrained the Respondent from invocation of bank guarantees. In this post, authors will critically analyse the order and its impact on future litigation.
A contract was executed between the Petitioner and the Respondent for the drilling of three wells in the state of Rajasthan. As per the terms of the said contract, the Petitioner furnished eight bank guarantees in favour of Respondent. Subsequently, the Petitioner filed an application under Section 9 of the Arbitration and Conciliation Act 1996, seeking interim protection by way of restraining the Respondent from encashment of the said bank guarantees.
The Petitioner submitted that owing to a complete lockdown on industrial activities due to the COVID-19, the project could not completed on time. As a result, Petitioner invoked the force majeure clause for relief. However, the Respondent did not accommodate the relief sought by the Petitioner and was adamant to terminate the contract.
The Respondent submitted that the court cannot restrain the Respondent from encashment of bank guarantees based on the following two arguments. First, in law, the only ground pursuant to which invocation of a bank guarantee can be stayed is egregious fraud, and in the present case, no fraud has been constituted. It was further argued that the Petitioner’s allegations were insufficient to prove that there was any fraud in this transaction. Second, the Respondent elaborated the communication (which took place between the Respondent and the Petitioner) in order to prove that the Petitioner had been extending the time limit for completing the work. Further pleadings were made before the court that the Petitioner’s plea of force majeure is clearly afterthought and cannot be said to constitute a justifiable basis to grant an injunction.
Delhi High Court’s Decision
The court passed an ad-interim order in favour of the Petitioner, restraining the Respondent from the encashment of bank guarantees. The High Court’s decision to injunct the Respondent from encashment of bank guarantees was primarily based on the following reasons:
The court rejected the Respondent’s argument that judicial intervention with encashment of bank guarantees is permissible only in cases of egregious fraud.
The court relied upon U.P. Cooperative Federation Ltd. v. Singh Consultants and Engineers (P) Ltd., Svenska Handelsbanken v. Indian Charge Chrome and Standard Chartered Bank Ltd. v. Heavy Engineering Corporation and held that in order to restrain encashment of a bank guarantee, there should be a good prima facie case of fraud or special equities in the form of preventing irretrievable injustice between the parties.
It held that the unprecedented country-wide lockdown is in the nature of force majeure and the same had resulted in a case providing for special equities. Thus, affirming that special equities do exist in the present case.
It further observed that if bank guarantees are allowed for the purpose encashment, petitioner would suffer irreparable injury and irretrievable injustice.
The court stated that every case has to be decided on its own peculiar facts and circumstances.
Analysis of High Court’s Order
Due to the nationwide lockdown, parties are not in a position to perform their contractual obligations. Therefore, various cases in relation to the termination of contract or encashment of bank guarantees have started coming before the courts across the country. One of the common questions arising in all litigation is whether nationwide lockdown due to COVID-19 outbreak constitutes a force majeure event. The judicial intervention in the performance of contract has always been debatable; however, it became more debatable when the court restrained the beneficiary from invoking and encashment of bank guarantees. The reason behind this is that a bank guarantee is an independent contract between a bank and a beneficiary, and the bank is always obliged to honour its guarantee as long as it is an unconditional and an 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.
In Halliburton, the Delhi High Court seems to have ignored and misinterpreted the precedent set by the Supreme Court of India and foreign courts. In the present case, the court placed reliance on Standard Chartered Bank Ltd. v. Heavy Engineering Corporation (Standard Chartered Bank), in which the Supreme Court of India held that the court can only injunct encashment of a bank guarantee if the case falls in any of the exceptions to the rule, when there is case of fraud or special equities which causes irretrievable harm/injustice. In Halliburton, the High Court twisted the ratio laid down by the Supreme Court of India in Standard Chartered Bank by holding that the court in the said case seemed to visualize irretrievable injustice and special equities as distinct circumstances, the existence of either of which would justify an order of injunction. However, the court granted the relief by relying upon both the elements i.e. special equities and cause of irretrievable harm/injury, which leads to ambiguous interpretation of Standard Chartered Bank.
While dealing with the aspect of irretrievable injury, the court relied upon Svenska Handelsbanken v. Indian Charge Chrome in which it was held that the irretrievable injury required to be of the nature as noticed in the case of Itek Corporation v. First National Bank of Boston (Itek). In Itek, an exporter in the USA entered into an agreement with the imperial government of Iran and sought an order terminating its liability on stand 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 on the situation created after the Iranian revolution. The court held that any claim for damages against an Iranian purchaser if decreed by the American court would not be executable in Iran under these circumstances and encashment of bank guarantee would cause irreparable harm to the plaintiff; thus, the court restrained the encashment of bank guarantee. In addition to that, the court observed that to avail this exception, exceptional circumstances which make it impossible for the guarantor to reimburse himself if he ultimately succeeds will have to be decisively established. However, in Halliburton, the Petitioner did not contest any of the conditions as laid down in Itek to establish irretrievable injury; thus, it was not appropriate on the part of court to rely upon Itek to determine ‘irretrievable injury’ in Halliburton.
After the analysis of the ad-interim order, it is clear that in Halliburton, the Delhi High Court has taken a different perspective to deal with issues related to the invocation and encashment of the bank guarantees from the precedent and recent judicial trend. Recently, the Bombay High Court in Standard Retail Private Limited v. G.S. Global Corp, and the Delhi High Court in Indrajit Power Private Limited v. Union of India (Indrajit Power), while dealing with a similar issue, have taken a contrary view. In both these cases, courts have refused to put a stay on invocation and encashment of the bank guarantees. An interesting part in Indrajit Power is that the court relied upon the same decisions as the court in Halliburton but took a different view. This manifests that the issue related to the invocation and encashment of bank guarantees in the times of COVID-19 is not settled. As far as Halliburton is concerned, the ad-interim injunction order will stay in force until the next hearing, thus not holding any precedential value. However, it would be beneficial for courts and concerned parties if the Supreme Court of India is able to clear the air on this issue.
1988 (1) SCC 174.
1994 (1) SCC 502.
2019 SCC Online SC 1638.
Standard Chartered Bank Ltd v. Heavy Engineering Corporation, 2019 SCC Online SC 1638.
1994 1 SCC 502.
566 Fed Supp 1210.