Covid 19

Introduction

The Hon’ble Delhi High Court, in its decision dated 28 April 2020 in Indrajit Power Private Limited v Union of India & Ors, has dismissed a writ petition seeking to refrain the invocation of a bank guarantee by the Union of India (Respondent No 1) inter alia due to the financial distress caused by the national lockdown and that the COVID-19 pandemic was a force majeure under the agreement between the parties.

Background

The Petitioner was a successful bidder of the auction conducted by Respondent No 1 for the Nerad Malegoan Coal Mine. Thereafter, a Coal Mine Development and Production Agreement dated 16 March 2015 (Agreement) was entered into between the Petitioner and Respondent No 1. Under the Agreement, the Petitioner was required to submit a performance security in the form of an irrevocable and unconditional bank guarantee, which the Petitioner accordingly deposited. The Agreement also laid down the events and the manner in which the Petitioner’s performance security would be appropriated by Respondent No 1.

Eventually, the Petitioner failed to comply with the efficiency parameters and timelines of various contractual milestones, for which show-cause notices were issued by Respondent No 1 and representations were made by the Petitioner before a scrutiny committee to justify its non-compliance. Thereafter, Respondent No 1 intimated the concerned bank of its decision to invoke the performance security.

Consequently, the present writ petition was filed by the Petitioner inter alia seeking to refrain Respondent No 1 from appropriating the bank guarantee amount and for renewal of the bank guarantee which was due to expire.

Key Arguments by the Petitioner

The Petitioner submitted that the power plant run by them was non-operational due to the COVID-19 lockdown and in these circumstances, the Petitioner had no immediate source of revenue and only limited funds in its account to pay the salaries of around 500 employees for 1-2 months. If the bank guarantee amount was appropriated, the Petitioner would have to pay a heavy sum from its working capital account to the bank which would not only lead to non-payment of salaries of the employees but also financial default and possibility of being declared as a NPA.

The Petitioner further submitted that the invocation of the bank guarantee was barred in view of COVID-19, which is a pandemic covered under the force majeure clause in the Agreement. Separately, it was emphasized that the ground of COVID-19 was independent of the merits of the matter because various businesses and banking activities were under severe stress and in such circumstances, the bank guarantee ought not to be invoked. In support thereof, reliance was placed on orders of the Delhi HC dated 6 April 2020 passed in Anant Raj Limited v Yes bank (W.P. (C) Urgent No. 5/2020) and dated 3 April 2020 in India Bulls Housing Finance Ltd. v Securities Exchange Board of India & Ors (W.P. (C) Urgent No. 7/2020) (Cited Orders), where relief was granted by the Court in relation to payment of instalments to the bank and declaration of NPA during the lockdown period . Thus, it was argued that on the principle of pari materia treatment, the encashment of the bank guarantee in the present case may also be stayed and the Petitioner be permitted to renew the bank guarantee.

The Petitioner also argued that completed 83% of the work under the Agreement had been completed by them, the balance steps could not be taken because of civil commotion at the acquisition site. This also amounted to a force majeure exemption in the Agreement.

In these circumstances, it was submitted that the invocation of the bank guarantee was unfair, inequitable and unreasoned as it did not consider the submissions made by the Petitioner in the reply to show cause notices and as such, was in gross violation of principles of natural justice.

Reliance was also placed on certain interim orders passed prior to COVID-19 restraining the invocation of bank guarantees in other coal mine matters.

Arguments by the Respondent

In response, the Union of India argued that the Petitioner failed to comply with the efficiency parameters under the Agreement and, therefore, they were constrained to issue show cause notices to the Petitioner for non-compliance with the timelines of various contractual milestones.

At the request of the Petitioner, an extension of 12 months was already granted to commence mining operations. However, the Petitioner continued to be in the breach of efficiency parameters despite lapse of more than a year and sought a further extension of 12 months. In this regard, a scrutiny committee was constituted which considered the submissions of the Petitioner and gave it a due opportunity to present its case. Thus, the decision to invoke the performance security was issued after due compliance of natural justice and the provisions of the Agreement.

Considering the fact that the bank guarantee is unconditional and irrevocable, there can be no fetters upon encashment of the same and hence it is liable to be invoked on demand by the Respondent. It is settled law that courts in writ jurisdiction do not interfere in the cases of invocation of bank guarantee unless in exceptional cases of (i) irretrievable injustice, or (ii) fraud. The irretrievable justice should be genuine, immediate and irreversible. It should be a case where the party seeking restraint on invocation of bank guarantee has no adequate remedy in law at all and the harm caused would be irreparable. Since it was not so in the instant case, the present writ petition ought to be dismissed.

Further, the Respondent no. 1 submitted that the Petitioner’s non-compliance of the contractual milestones despite extension, precedes the lockdown and hence the Cited Orders were distinguishable and not applicable to the present case.

Judgment of the Delhi HC

The Court held that the Petitioner was in non-compliance of milestones since April-June 2018 and despite the extension of 12 months, its position remained the same. The Court held that the reliefs granted in the Cited Orders are not applicable in the present case for the simple reason that the lockdown came into force in India with effect from 24 March 2020 whereas the Petitioner had been in default much before that date.

Relying on the decisions of the Delhi High Court in Umaxe Projects Private Limited v Air Force Naval Housing Board & Anr (2019 SCC Online Del 9126) and Classic KSM Bashir JV v Rites Limited & Ors (2018 SCC Online Del 8888), wherein the law related to invocation of bank guarantees has been analyzed in detail, the Court held that merely because invocation would cause financial distress is not a ground of stay, except in cases of irrevocable injury.

It was further held that the request of the Petitioner for a further extension of 12 months was rightly rejected and that the existence of a dispute does not affect right to appropriate performance security or terminate the Agreement.

Thus, the Court held that the Respondent’s decision was neither illegal, nor perverse or discriminatory and accordingly dismissed the writ petition.

Comments

While the primary reason for rejection of the present petition was that the Petitioner was in non-compliance of its obligations since 2018 i.e. much before the national lockdown, the Court has gone into the aspect of analysing the case from the lens of COVID-19 as well. In keeping with the recent trend followed by courts in India, this Court dismissed the ground taken by the Petitioner of financial difficulties being caused due to COVID-19 / lockdown, to justify non-performance of its obligations. Once again, the Court has adopted a very strict approach while interpreting the force majeure clause while keeping in mind the specific facts and circumstances of the case. This also indicates that courts may be less willing to entertain even genuine difficulties being faced by a party due to COVID-19 / lockdown, if the courts can see that the party has been in default of its obligations since before the lockdown or spread of COVID-19.

The court seems to have followed the settled position of law regarding invocation of bank guarantees. However, even in the prevailing circumstances, the court has kept the scope very narrow for what may be construed as an ‘irrevocable injury’. The Petitioner argued that in case of invocation of the guarantee, it may be rendered incapable of continuing to pay salaries to its employees, around 500 in number. While it seems that the court has not gone into the merits of this argument, it could be a matter of concern for employers and employees of a financially stressed entity during this pandemic.

-       Chakrapani Misra (Partner), Kathleen Lobo (Principal Associate) and Saasha Malpani (Associate)

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