Contractor cannot claim COVID-19 force majeure for pre-pandemic breaches from September 2019

Delhi HC held that COVID-19 cannot excuse contractual breaches that occurred prior to the pandemic outbreak. The contractor, in breach since September 2019, could not invoke force majeure for pre-existing defaults despite March 2020 lockdown. Force majeure clauses require narrow interpretation and parties must demonstrate genuine prevention and mitigation efforts. The court permitted invocation of performance and financial bank guarantees as they were unconditional, but directed advance bank guarantee proceeds be placed in joint account pending reconciliation of recoverable amounts. Ad-interim injunction was vacated.

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Issues Involved:

1. Termination of the contract.
2. Invocation of the Force Majeure clause.
3. Invocation and encashment of Bank Guarantees.
4. Completion and delays in the project.
5. Reconciliation of accounts and payments.

Issue-wise Detailed Analysis:

1. Termination of the Contract:
The contract dated 25th April 2018 between the Company and the Contractor was terminated by the Company on 13th April 2020. The termination was based on the Contractor's failure to complete the project within the stipulated timelines, despite repeated notices and opportunities to cure the breaches. The Company cited inordinate delays and non-performance by the Contractor as the primary reasons for termination. The Contractor, however, argued that the termination was illegal and malicious, attributing delays to the Company's actions and the impact of the COVID-19 pandemic.

2. Invocation of the Force Majeure Clause:
The Contractor invoked the Force Majeure clause on 18th March 2020, citing the COVID-19 pandemic as the reason for delays in project completion. The Force Majeure clause in the contract covers epidemics and pandemics, excusing performance if hindered by such events. However, the Court found that the Contractor was already in breach of the contract before the COVID-19 outbreak. The Contractor's performance had been delayed since September 2019, and the pandemic did not justify the non-performance. The Court emphasized that Force Majeure cannot provide succour to a party already in breach of contractual obligations.

3. Invocation and Encashment of Bank Guarantees:
The Company invoked the Bank Guarantees on 13th April 2020, following the termination of the contract. The Contractor sought to restrain the invocation, arguing that the guarantees should not be encashed due to the Force Majeure event. The Court, however, held that the Bank Guarantees were unconditional and irrevocable, and their invocation was justified based on the Contractor's breach. The law relating to Bank Guarantees is clear that they must be honoured unless there is egregious fraud or special equities, neither of which was established in this case.

4. Completion and Delays in the Project:
The project involved the development of three fields - Mangala, Bhagyam, and Aishwarya - with specific milestones and completion dates. The Contractor failed to meet the original completion dates of January, March, and June 2019 for the respective fields. Despite multiple revised milestones and progress reports, the Contractor did not achieve the agreed deadlines. The Court noted that there was hardly any work done in the months leading up to the invocation of the Force Majeure clause, indicating a lack of progress and non-performance.

5. Reconciliation of Accounts and Payments:
The Contractor claimed that a substantial portion of the project was completed, and it was owed significant amounts for unpaid invoices and variations. The Court directed that the amount of the Advance Bank Guarantees, upon encashment, be placed in a separate joint account held by both parties. The parties were instructed to reconcile accounts within two weeks to determine the unrecovered portion of the advance payment. Any disputes regarding the reconciliation could be referred to the Arbitral Tribunal.

Conclusion:
The Court vacated the ad-interim order restraining the invocation of the Bank Guarantees and directed the amounts to be placed in a joint account for reconciliation. The judgment emphasized the importance of adhering to contractual terms and held that the Contractor's past non-performance could not be excused by the COVID-19 pandemic. The respective claims and counterclaims of the parties were left to be adjudicated by the Arbitral Tribunal.

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