Delhi High Court on Automatic Triggering of Force Majeure

-Gunjan Chhabra, Partner

Recently, the Delhi High Court in a Writ Petition before it decided an important issue relating to the applicability of Force Majeure owing to the prevalent circumstances of the COVID19 Pandemic, by way of an Order dated 12.06.2020. In MEP Infrastructure Developers Ltd. v/s South Delhi Municipal Corporation and Ors. [W.P. (C) No. 2241/2020], the Petitioner (“MEP”) was being unable to pay its toll tax collections, as per the Toll Tax Collection Agreement dated 28.09.2017 (“Agreement”) between MEP and the Respondent (SDMC), owing to which SDMC had gone ahead to terminate the Agreement.

 The disputes between the parties were ongoing, where after several stay orders, modifications of stay orders kept taking place, depending on the change in situation. Thereafter, in its March 2, 2020 Order, the Hon’ble Delhi High Court granted interim protection (including from termination) to MEP,  provided that MEP abided by an earlier order according to which MEP was to pay Rs. 115.04 Crores in three equal monthly instalments, continue to pay Rs. 20 Crore per week, and also ensure issue of fresh Post Dated Cheques. (in short conditions already laid down by Court for compliance by way of its previous Order dated 26.11.2019).

Thereafter, MEP could not abide by the Order dated 02.03.2020 in fulfilling its payment obligations, although SDMC was in possession of MEP’s Performance Bank Guarantee worth Rs. 64 Crores. SDMC interpreted this to be a breach of the High Court’s 02.02.2020 order, which terms the interim protection to be subject to the fulfilment of the conditions by MEP as provided by the Order. As a consequence it went ahead to terminate the contract with MEP on 16.03.2020. SDMC also encashed this Bank Guarantee and appropriated to itself Rs. 64 Crores on 16.03.2020, the date of termination being 14.04.2020.

Consequently, the national lockdown took effect on 24.03.2020, whereafter, SDMC issued a letter dated 04.04.2020, extending the effective date of termination (from 14.04.2020, to 05.05.2020) in view of the lockdown, effectively excluding the 21 day period of the lockdown. Thereafter, giving a view to this letter, as also extension of the lockdown, the Delhi High Court vide Order dated 20.04.2020, further extended the effective date of termination to 24.05.2020. However at this stage, although they did not restrain SDMC to float a fresh NIT, it did restrain SDMC from terminating the Agreement with MEP. The order was further clarified on 27.04.2020 to hold that the the fresh NIT would be issued, subject the outcome of this present petition filed by MEP, therefore effectively securing rights in favour of MEP.

In the present circumstances, certain further facts, had now arisen, which called for modification of the initial order dated 02.03.2020.

For proceeding further in this discussion, it is important to review certain clauses of the contract as well as government notifications.

IMPORTANT CLAUSES AND GOVERNMENT NOTIFICATIONS

The Force Majeure Clause in the contract provided a procedure for occurrence of a Force Majeure Event. It provided that whenever a force majeure event occurred, a party was to provide notice to the other no later than 5 days following the occurrence of the force majeure event with requisite documentary proof and particulars of its claim.

The contract also gave a right to SMDC to terminate the contract, as also to invoke the Bank Guarantee, incase there are repeated delays and defaults in remittance of weekly instalment of toll tax.

Government of India Notification dated 19.02.2020 provided a definition and consequence of Force Majeure, and that a party has to give notice of Force Majeure as soon as it occurs and it cannot be claimed ex-post facto. It also provide that if a Force Majeure occurred for more than a period of 90 days, then either party may terminate the contract without any financial repercussion on either side. The notification dated 19.02.2020 can be accessed here.

MORTH, Government of India notification dated 18.05.2020 was later released as a notification for relief of Contractors/Developers of Road Sector. It specifically provided that “MORTH vide letter no. H-25016/01/2018-Toll dated 25th March 2020 conveyed that the lockdown period and subsequent prevailing condition of low traffic due to unprecedented COVID-19 epidemic outbreak, may be treated as Force Majeure of the Concession/Contract Agreement as per Ministry of Finance Letter no. F.18/4/2020-PPD dated 19th Feb, 2020…” and thereafter went on to provide various reliefs under different contracts of NHAI. The notification dated 18.05.2020 is accessible here.

The clauses and notifications have a heavy bearing on the consequent modification which the Delhi High Court made.

ISSUES WHICH AROSE BEFORE COURT

The issues which arose before Court were whether MEP has infact breached the Order dated 02.03.2020, and also whether SDMC was justified in terminating the Agreement with MEP, as a consequence of this breach on 16.03.2020.

OBSERVATIONS AND DECISIONS

The Delhi High Court in fact went ahead to modify the Order and the rights and liabilities of the parties. The basis for doing so was as follows:-

  1. The Court’s order dated 02.03.2020, called for payment of Rs. 20 Crores per week, and Rs. 115 Crores to be paid in three equal monthly instalments. In effect a total amount of Rs. 78 Crores was due to the Respondent as on 16.03.2020 out of which 14.5 Crores was paid by MEP to SDMC directly, and an additional Rs. 64 Crores had been appropriated by SDMC on 16.03.2020 by invoking the Bank Guarantee. So in effect the amounts paid out to SDMC by 16.03.2020 were actually 78.5 Crores, which is more than the Rs. 78 Crores due on 16.03.2020. However, the fact of the availability of the Bank Guarantee amount with SDMC was overlooked in the 02.03.2020 order. Also this makes it evident, that as on 16.03.2020, there as no cause for termination, because strictly speaking there was no breach of Order dated 02.03.2020 on that date.
  2. SDMC itself referred to Circular dated 19.02.2020 issued by the Ministry of Road Transport Highways (MORTH) which notified that the COVID-19 pandemic was a force majeure occurrence. In effect, the force majeure clause under the agreement immediately becomes applicable and the notice for the same would not be necessary. In effect this meant, that the giving of the Force Majeure notice on 19.03.2020, would not be the triggering event for the Force Majeure but the obligations of parties according but the Force Majeure automatically comes into effect with effect from 19.02.2020 itself. Strict timelines would therefore stop being applicable.
  3. The Delhi High Court by order Dated 25.03.2020 had ordered that interim orders obtaining as on 16.03.2020 would continue upto 05.05.2020, which was subsequently extended. Therefore even from this angle, the termination on 16.03.2020 was premature.

On the basis of the above conclusions, the Delhi High Court modified its Order dated 02.03.2020 to include:-

  1. As on that date the pending amounts payable by MEP after adjusting the Bank Guarantee amount and amounts already paid, stood at Rs. 77.04 Crores, which were to be released by MEP within 10 days, failing which interim order would stand vacated.
  2. The weekly payment of Rs. 20 Crores would stand suspended in view of the force majeure clause. Still any amounts which were infact collected by MEP would still be deposited with SDMC after deductions towards maintenance costs etc.

DENOUMENT

The effect of this judgment seems to be, that once there’s a government notification declaring that Force Majeure comes into affect automatically, it supersedes the specific requirement of notice, as per any contract clause. This will also be a major relief to road contractors/toll operators working on National Highways projects, who might not have notified Force Majeure in the prevalent circumstances in a timely manner, and to whom, the Government Notification dated 19.02.2020 is applicable.

The entire Order dated 12.06.2020, can be accessed here.

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Grateful to Shashwat Sharma, 1st Year Law Student, GLC Mumbai, for his research inputs, who is currently interning with Adwitya Legal LLP.

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