Delhi High Court Vacates Order Restraining Vedanta From Invoking Halliburton’s Bank Guarantees

The Delhi High Court has vacated its earlier order which restrained Vedanta Ltd. from invoking bank guarantees issued by Halliburton Offshore Services Inc., pertaining to a contract involving construction of integrated oil wells and development of certain surface facilities.

The dispute arose due to alleged multiple delays in the execution of the project by Halliburton, which prompted Vedanta to invoke the guarantees as per the agreed terms of the underlying agreement. The oil rig contractor, however attributed the delay on the outbreak of Covid-19, among others, and opposed the invocation of guarantees on grounds of force majeure and other factors attributable to Vedanta.

While Vedanta claimed a sum of $250 million as liquidated damages arising from the delay in completion of the project, Halliburton had raised a claim for outstanding amount of $91 million from Vedanta.

A Delhi High Court bench comprising Justice Pratibha M Singh vacated the stay on invocation of bank guarantees by observing that the earlier order was interim in nature and was to remain in effect till the completion of court pleadings. The court said: “Halliburton had clearly defaulted in performance despite repeated opportunities”.

Bank guarantees are unconditional, irrevocable and the bank would have to make the payments simply on demand by a party, the court said. It also directed Vedanta to ascertain the recoverable amount from the oil rig contractor by reconciling the accounts and pending invoices.

The high court said that:

• An examination of the monthly progress reports indicated that miniscule work was carried out by Halliburton before invocation of the force majeure clause.
• The oil rig contractor was in breach of the contract as it did not adhere to the deadlines for completion of the project.
• The agreement excused the oil rig contractor from the performance if it was prevented or hindered by a pandemic. However, every breach or non-performance cannot be justified or excused merely on the invocation of Covid-19. Therefore, past non performance by Halliburton cannot be condoned and force majeure cannot be an excuse for non performance of the contract.

The Backstory

Cairn Energy, a Vedanta group entity, had floated a global tender for development of oil fields in Rajasthan. Halliburton emerged the successful bidder for development of three fields—Mangala, Bhagyam and Aishwarya. The parties entered into a contract on April 25, 2018, for a value of $197 million for the projects which had to be successfully completed before January 2020.

As per the agreement, Vedanta extended an advance which could be offset by Halliburton against future receivables. The agreement stipulated that the oil rig contractor must adhere to the timelines failing which Vedanta could invoke three kind of guarantees: advanced guarantees, to secure advances paid by Vedanta; financial guarantees, meant for securing liquidated damages; and performance guarantees to ensure efficient performance of the contract.

However, implementation of the project suffered delays leading to the formation of a project committee, which recommended quicker implementation of the project. Despite this, Halliburton failed to complete the project before the stipulated deadline.

Halliburton’s Arguments

Senior Counsel Gopal Subramanium, who appeared for Halliburton, sought an extension of the interim stay on invocation of guarantees. He argued that:

• A substantial part of the project was already executed and only 3-5% of the total work remained incomplete.
• Force majeure applied in this case as the Covid-19 induced lockdown had prevented travel of personnel required for installation of the project equipment.
• Vedanta chose to terminate the contract despite an assurance of completing the project by March 31.
• Bank guarantees cannot be encashed till liquidated damages are determined by the parties. The manner in which Vedanta terminated the agreement showed “malafide intent”.

Vedanta’s Counter

Senior Counsel Harish Salve, who argued for Vedanta, opposed extension of stay on the following grounds:

• Bank guarantees are independent contracts and not dependent on the main agreement between the parties. As such, they are not connected with any dispute in connection with underlying contract.
• Correspondence between the parties show Halliburton grossly delayed the execution of project. Halliburton was already in breach of the agreed terms before outbreak of Covid-19.
• The apex court had made it clear that an Injunction against invocation of bank guarantees can be issued only in extreme situations, which was not the case in the current dispute.