Halliburton v Vedanta: Performance bonds and COVID-19

On April 20, 2020, the Delhi High Court issued an ad-interim (temporary) injunction restraining Vedanta from calling performance bonds issued by Halliburton (Halliburton Offshore Services v Vedanta Limited (O.M.P. (I) (COMM) & I.A. 3697/2020).

What is interesting about this decision, and one which raises as many questions as it answers, is that it was based on the lockdown in India due to COVID-19 constituting a force majeure event excusing Halliburton from having to continue to perform its obligations during the period of lockdown.

The facts: Halliburton was the drilling contractor for Vedanta on three onshore oil and gas blocks in the state of Rajasthan in India. Under its contract, Halliburton was supposed to have completed drilling of these wells by 16 January 2019, 16 March 2019 and 16 June 2019 respectively. Therefore, by the time the injunction application was lodged earlier this month, Halliburton was technically in delay.

Halliburton asserted that its delay had been excused by the extension of time granted until 31 March 2020, a matter that Vedanta disputed. On 18 and 25 March 2020, shortly before Halliburton took out its injunction application, and before the asserted period of extension of time expired, Halliburton gave notice of force majeure to Vedanta based on the COVID-19 related lockdown in India.

Vedanta’s submission was that the only basis on which the court could interfere with the call was if the call was fraudulent, which it was not. Vedanta’s submission was similar to what would be the position had the bonds been governed by English law, as set out in Edward Owen Engineering v Barclays Bank [1978] Q.B. 159 and in the cases following.

The Delhi High Court disagreed. Adopting Halliburton’s submissions, the Court held that, in addition to fraud, Indian law allowed a bond call to be restrained if “special equities” could be shown. Treating the lockdown due to COVID-19 as “unprecedented, and .. incapable of having been predicted” by either party, the court seemed to be of the view that “special equities” had been established in the present case.

At first blush, this decision may appear obvious. The COVID-19 pandemic has caused serious disruption to the supply chain of labour and materials. Halliburton had argued that, as at 18 March 2020, the date on which it gave Vedanta the force majeure notice, only between 2.1% and 5.5% of the work remained to be completed. Had it not been for the lockdown, the works would have been completed by 31 March 2020. Given the circumstances, a call on the performance bonds seemed to be unjustified.

But could it really be said to have been unjustified, in law? The Court’s decision throws up two particular questions that may also arise in other courts or jurisdictions that seek to follow the COVID-19 as a force majeure theme in interfering with bond calls.

Irretrievable harm, special equities and other grounds in addition to fraud

First, the decision seems to buck the current trend of courts across jurisdictions that are seeking to uphold the sanctity of contractual arrangements and tightening the grounds on which bond calls can be restrained.

It is well known that certain jurisdictions outside of English law have been open to grounds for restraining bond calls on grounds that fall short of fraud. For instance, in Singapore, unconscionability – held to mean abuse, unfairness, and dishonesty, being broader than the notion of fraud (BS Mount Sophia Pte Ltd v Join-Am Pte Ltd [2012] 3 SLR 352) – is a ground commonly cited in injunction applications to restrain calls on bonds. This submission has become so commonplace that beneficiaries of bonds have started to draft contractual provisions that preclude the procurer of the bonds from relying on unconscionability as a basis for injunctions against bond calls. Such provisions have been tested in the Singapore courts and found to be valid (CKR Contract Services Pte Ltd v Asplenium Land Pte Ltd [2015] 3 SLR 1041) with dicta in a recent Court of Appeal decision indicating that any argument that such clauses fall foul of the Unfair Contract Terms Act would also have no merit (Bintai Kindenko Pte Ltd v Samsung C&T Corp and another [2019] 2 SLR 295).

Therefore, even in jurisdictions that had previously broadened the grounds for interfering with bond calls, one sees a drawing-back. An on-demand bond has been said to be ‘as good as cash’. However, even while upholding the ground of unconscionability as the basis of restraint, it has not escaped the Singapore Court of Appeal that there is a ‘perennial tension’ between the interests of the procurer and beneficiary of the bond (BS Mount Sophia). Liquidity concerns, for instance, can apply equally to the beneficiary of the bond who, for instance, may need funds to complete works left unfinished. It is therefore in the rarest of cases that calls on bonds are restrained.

The decision in Halliburton v Vedanta seems to buck that trend.

If one examines the Court’s decision as to why an event of force majeure affecting the underlying drilling contract was able to affect a distinct contract involving a third-party bank (i.e. the performance bonds), one can see analysis that starts by relying on a US court authority from 1983 (Itek Corporation v. First National Bank of Boston 566 Fed Supp 1210 (“Itek”)) and construes the test of irreparable/irretrievable harm used to justify the grant of an injunction in Itek to fall within the concept of “special equities” under Indian law justifying the grant of a restraint (though the Court also goes on to hold that the ground of “special equities” is a basis that is additional to fraud and occurrence of irretrievable injury on which a call could be restrained).

As far as one is able to tell from the Court’s summary of the facts in Halliburton v Vedanta, the conditions seem to be different from those that existed in Itek. In Itek, a US exporter sought to terminate its liability under stand-by letters of credit issued by a US Bank in favour of an Iranian Bank. Following the Iranian revolution, the US Government had blocked all Iranian assets under the jurisdiction of the United States and cancelled export contracts. The US court took the view that any claim for damages against an Iranian purchaser arising from a fraudulent draw-down of the letters of credit would not be executable in Iran given these circumstances, and therefore allowing encashment of the bank guarantee/letters of credit would cause irreparable harm to the plaintiff. The court therefore restrained the call.

There seem to be two differences between Itek and Halliburton v Vedanta.

First, in Itek, there had been a prior finding of fraud in the making of the call, and therefore the examination of whether there would be irreparable damage were the injunction not to be granted was based on that prior finding. While there was a submission by Halliburton that Vedanta’s call was also fraudulent, the Court does not seem to have been persuaded by that submission – at least at the ad-interim stage.

Secondly, the Court in Halliburton v Vedanta accepted that the circumstances in Itek were “exceptional circumstances which [made] it impossible for the guarantor to reimburse himself if he ultimately succeeds” and that “a mere apprehension that the other party will not be able to pay, is not enough”. There does not seem to been a similar submission by Halliburton as to Vedanta’s ability to repay. Yet, the Court took the view that if no interim protection was granted, and the bank guarantees were allowed to be encashed while the lockdown was in place, “the injury and prejudice that would result to the petitioner merits being categorised as irretrievable”.

Perhaps, these arguments may be examined more closely when the matter returns before the Court for a fuller hearing on whether the injunction should be made more permanent pending the outcome of the arbitration.

There is no doubt that the current COVID-19 pandemic is an exceptional and deeply disruptive event. But whether it provides a further basis for courts to interfere with financial instruments is a matter that merits consideration and debate.

That this is a somewhat tricky question has perhaps been recognised in Singapore. In response to the COVID-19 pandemic, the Singapore parliament enacted certain “temporary measures” under the COVID-19 (Temporary Measures) Act 2020. In introducing the Bill that led to the Act, the Minister of Law openly admitted that Parliament was interfering with the freedom of contract on an exceptional basis because such interference was justified by the current circumstances. One of the measures is to prevent the beneficiary of a performance bond from making a call on the bond until at least seven days before the performance bond expires if the default prompting the call is materially caused by COVID-19 (section 6 of the Act). A legislative imprimatur, particularly one that is temporary for the duration that the effects of COVID-19 are felt, seems to a convenient route for jurisdictions to achieve a balancing of interests without having to shape existing legal principle in order to do justice.

Expiration of validity of performance bonds

The second interesting issue that the Halliburton v Vedanta decision raises is the question of what would happen to an injunction against a bond call that lasts for the period of a lockdown if the lockdown is extended beyond the period of validity of the bond.

In Halliburton v Vedanta, the Court has currently granted an injunction for a period that ends seven days after the end of the lockdown. Currently, the lockdown in India is set to end on 3 May 2020. Five of the eight performance bonds that were the subject of a call in Halliburton v Vedanta will expire on 30 June 2020. While there is still some gap between the end of the period of injunction and the expiration of some of the bonds, what would happen were the lockdown to be extended by a period that ended after the date of expiry of the bonds? Would the balance of convenience at that stage shift in favour of the beneficiary being allowed to proceed with the call to protect its interests because not allowing a call would cause irreparable damage to the beneficiary instead?

In practice, a threat of a call because of an imminent expiry of a bond is often met with an offer by the party procuring the bond to extend the validity of the bond. This is a sensible approach and causes the least disruption and cost to both the procurer of the bond and the beneficiary. However, this approach assumes that the procurer is able to obtain an extension of the bond.

In the case of Halliburton, after it filed the injunction application, Vedanta terminated the contract. In situations where the contractor’s contract has been terminated, it is often difficult for the contractor to obtain an extension of bonding facilities. We have seen this in the English case of Liberty Mercian Ltd v Cuddy Civil Engineering Ltd and another (No 2) [2014] EWHC 3584 (TCC) where the contractor’s inability to obtain a performance bond because the underlying contract had been terminated led the court to have to order the contractor to pay money into the court in lieu of the performance bond.

So, we could encounter a situation, either in Halliburton v Vedanta or in future lockdown-related injunction cases, where the “special equities” may change depending on the interaction of the period of lockdown and the expiry of the bond. Again, this is an area expressly dealt with by Singapore’s COVID-19 (Temporary Measures) Act 2020 that provides that the period of validity of any bond that would otherwise expire during the period that the Act prohibits a call from being made, will be automatically extended (upon application by the procurer) to a period ending seven days after the prohibition is lifted (section 6 of the Act). Such ‘deeming’ provision does away with the uncertainty as to whether the bank providing the bond would agree to an extension, and on what terms.

Of course, it would be open for a court facing a call on the bond whose expiration is imminent to order that the bank honour the call but hold the funds with itself pending final resolution of the dispute. But that sort of order would probably only be made if there was a risk that the beneficiary would not be good for the money if it were required to repay in due course. This risk does not seem to have been argued to exist in Halliburton v Vedanta.

The ad-interim injunction issued by the Court will stay in force until the next hearing on 11 May 2020. It will be interesting to see how the Court deals with this issue on fuller submissions at that stage.

Dealing with the impact of COVID-19

COVID-19 and the resultant impact on contractual performance is a hot topic across legal circles across the world. Issues affecting contractors and employers who are dealing with COVID-19 related disruptions under English and Hong Kong law have been the subject of an excellent article by two of my fellow members of Chambers Andrew Goddard QC and Mischa Balen, and can be found here.

The injunction application in Halliburton was heard by the New Delhi court by video conference, something that is becoming increasingly common during this lockdown period. Camille Slow one of my fellow members of Chambers, recently conducted a hearing by video conference in the Technology and Construction Court in London, and she has written about her experience and provided some practical tips in an article that can be found here.

The author is Shourav Lahiri, working at Atkin Chambers Barristers.