Force Majeure Status in connection with National Disaster of COVID-19 Declaration and its Legal
In light with the rapid spread of Corona Virus Disease 2019 ("COVID-19") in Indonesia, many parties are currently experiencing challenges and obstacles to fulfill their obligations in implementing business/contractual agreements. In the effort to stop the virus spread of COVID-19, up to issuance of this article, there are several government’s legal measurements including decisions and recommendations which directly or indirectly impact on business actors. One of the decisions issued was Presidential Decree Number 12 of 2020 on Declaration of Non-Natural Disasters of the COVID-19 as a National Disaster ("Presidential Decree 12/2020"). Since the issuance of Presidential Decree No 12/2020 on 13 April 2020, many questions and various interpretations have arisen regarding the implementation of force majeure clauses in business contracts.
Before further discussing about force majeure, it is first necessary to state that the definition of force majeure according to the Dictionary of the Indonesian Language (Kamus Besar Bahasa Indonesia - "KBBI") is:
"Events that are rationally cannot be anticipated or controlled by humans"
The KBBI definition above has more or less the same definition as the force majeure definition according to the Merriam Webster dictionary, where force majeure is:
"An event or effect that cannot be reasonably anticipated or controlled"
When examined in terms of contract/civil law, according to the Subekti, force majeure is a debtor's defense to show that the failure to carry out what was agreed caused by matters that are completely unpredictable, in which the party is unable to overcome such unpredictable circumstances or events which arise (Subekti. Hukum Perjanjian. Jakarta: PT. Intermasa, 2008, p.55). Of all the definitions as stated above, a similarity can be found in which force majeure is a condition that occurs outside the power or control of humans, where the situation can lead to the inability of someone to do something as a result of the situation.
In connection with the spread of COVID-19 in Indonesia, the Government through Presidential Decree 12/2020 has stipulated on its FIRST point:
“Stating the non-natural disaster of the spread of Corona Virus Disease 2019 (COVID-19) as a national disaster”
The issuance of Presidential Decree 12/2020 above is based on Law No.24 of 2007 concerning Disaster Management ("Law No.24 / 2007"). In Article 1 point 19 of Law No. 24/2007 it is stated that the definition of Disaster Emergency Status is:
"A situation determined by the Government for a certain period of time based on the recommendation of the Agency which is given the task to overcome disasters"
And in the same regulation, Non-natural Disasters are defined as:
"Disasters caused by events or series of non-natural events which include technological failure, modernization failure, epidemics, and disease outbreaks"
With the recommendation of the National Disaster Management Agency (Badan Nasional Penanggulangan Bencana - "BNPB"), the determination of COVID-19 as a national disaster has fulfilled the statutory requirements. However, it should be noted that the disaster emergency status can also terminated only with the recommendations of BPNB. After extensive interpretation towards the Presidential Decree 12/2020 and definitions above, the spread of COVID-19 which has been determined as a national disaster through Presidential Decree 12/2020 can be qualified as a force majeure situation considering the spread of COVID-19 as a matter which is beyond expectations and not can be anticipated and / or controlled by humans.
However, within the issuance of Presidential Decree 12/2020 arises questions whether with the determination of COVID-19 as a national disaster immediately suspends all the rights and obligations of the parties bound in the agreement on the grounds of force majeure and whether the reason of force majeure can be claimed for termination of the agreement of the parties?
FORCE MAJEURE REGULATION BASED ON INDONESIAN CIVIL CODE
Since the issuance of Presidential Decree 12/2020, many questions arise regarding force majeure and its implementations based on the law. Moreover, this situation affects the implementation of the agreements in Indonesia. In connection with force majeure and its implications for business contracts, generally the parties bound in the agreement set out clauses related to force majeure and the mechanisms that must be executed by the parties in such circumstances. However, in general in Article 1244 and article 1255 Indonesian Civil Code (“ICC”) regulates about force majeure which reads:
“A debtor shall be ordered to compensate for costs, losses and profit if he/she cannot prove that the non-performance of a legal obligation or the late performance of such legal obligation, is caused by something which is unforeseen, for which he/she cannot be held responsible, even in the absence of bad faith on his/her part.”
“There is no compensation for costs, losses or profit, if because of uncontrollable circumstances or because of happenstance, the obligor is prevented from delivering or performing something which is obligatory, or commits an act which is prohibited for him/her.”
Based on the above provisions in the event that there is no clause included regarding force majeure in a business agreement, the provisions of Articles 1244 and 1245 remain in force to the parties. For those who do not carry out obligations due to the force majeure, it cannot be held accountable for losses incurred as long as the party performing the default can prove that the performance was not carried out due to a force Majeure. In connection of force majeure caused of COVID-19, it can be concluded that matters that apply in force majeure are:
- The debtors must prove to the creditor that his inability to carry out the obligation is caused by COVID-19.
- Force majeur does not eliminate obligations from debtors. Debtor obligations remain real and must be implemented.
- If the debtor can prove his inability to carry out the obligation caused by COVID-19, then in the event of a delay in the implementation of the obligation, the debtor cannot be charged by reimbursement of costs, losses, interest, including but not limited to the potential profit that the creditor can receive if the debtor settles his obligations in accordance with duration of the agreement.
FORCE MAJEURE ARRANGEMENT BASED ON MUTUAL AGREEMENT
Regulation regarding force majeure in the ICC is still very general as explained above. There is no firm provision regarding the mechanism of agreement implementation in the occurance of force majeure gives room for the parties to bind in an agreement. In connection with this matter, within a business agreement should be regulated in detail in relation to the implementation mechanism of the rights and obligations of the parties in the event of force majeure. Such arrangement is based on the ICC which adheres to freedom of contract principle, where the parties are free to state their agreement as long as it does not violate the validity requirement of agreement. Freedom of contract itself regulated in Article 1338 paragraph (1) of the ICC, that:
“all contracts which have been legally concluded, have the same force as a legislative act for the parties who had concluded the contract”
Then based on the above provision, the parties of the agreement can regulate matters agreed upon in the event of a force majeure and it is binding as the law for those who make it. In the force majeure clause in general it may contain and be agreed specifically about for example:
- Circumstances considered as force majeure;
- Obligation of notification from one party for the existence of force majeure;
- The party charged for the loss incurred in the event of a force majeure;
- Postponement of performance;
- The right to submit an agreement termination; and
- And other things agreed.
The absence of rigid statutory related to force majeure in the agreement does not eliminate the obligations of the parties to prove their inability as explained above in relation to the enactment of Articles 1244 and 1245 of the ICC. However, by regulating matters of force majeure in detail within the agreement, the parties can obtain legal certainty over the mechanisms including the time period taken in the event of a force majeure situation in the implementation of the agreement.
FORCE MAJEURE LEGAL IMPLICATIONS
One of the concerns that occurred when the COVID-19 was determined as a national disaster was the legal implication that would occur if all rights and obligations in the agreement were delayed due to force majeure reasons. In fact, many parties do not expect that such unanticipated situation will occur at the time of their agreement implementation. In relation to the spread of COVID-19, the implementation of force majeure can be carried out by observing the causality relationship, namely by first identifying the contents of the business agreement that regulates the force majeure clause, and identifying whether the non-performance of an obligation is caused by COVID-19. With the Presidential Decree 12/2020, one party cannot immediately claim that an obligation is unable be carried out due to the spread of COVID-19, the party making the force majeure claim must first prove the elements of force majeure as explained above. For example: A and B are bound in a cooperation agreement where A is required to provide services in the form of an animated image for the benefit of B’s product marketing. A fails to deliver the animated image in which is its obligation within the period specified in the agreement with the reason of force majeure resulting from COVID-19. In this situation, B is not necessarily obliged to accept the reasons given by A regarding his failure to fulfill obligations due to COVID-19. Services provided by A are not directly affected by COVID-19, in connection with this, if A fails to prove to B that the delay is caused by COVID-19, then B has the right to reject the reasons, and the delay in submission of A’s obligations can be categorized as default event.
In the event that the force majeure consequences are not clearly regulated in a business contract, then this generally refers to Article 1244-1245 of ICC and applicable sectoral regulations. As an example for the banking sector, in response to the COVID-19 outbreak, the Financial Services Authority ("OJK") has issued the Republic of Indonesia Financial Services Authority Regulation Number 11 / POJK.03 / 2020 2020 concerning the National Economic Stimulus as a Countercyclical Policy on the Coronavirus Spread Impact Disease 2019 ("POJK 11/2020") which applies as a sectoral regulation for banking companies, the regulation applies a policy to determine assets and credits quality andalso financing restructuring to banking debtors which affected by the spread of COVID-19.
If there are no specific arrangements regarding the consequences of force majeure, in business or sectoral contracts, this will open the opportunity for the parties to renegotiate the obligations of the parties in the event of force majeure and make an addendum to the agreement, this is in accordance with the principle of freedom contract adopted by Indonesian Civil Law.
FORCE MAJEURE AND AGREEMENT TERMINATION
One of the things that has become a specter of doing business in COVID-19 is that there is a possibility of agreements which had been signed by the parties to be canceled. Such cancellation will certainly cause losses and may affect the financial situation which may lead to impact on other matters including but not limited to employment matters. In connection with the possibility of force majeure to terminate a business agreement, it must first observe the contents of the agreement whether it has included clauses related to the terms of the agreement termination or not. The ICC does not expressly regulate about termination of the agreement from the force majeure. Within this fact, the force majeure resulting of COVID-19 is subject to the applicable laws, including mutual agreements. If it is not regulated in a business agreement, the terms of the agreement termination is implicitly subject to ICC as a generally accepted statutory.
It can be conveyed that article 1266 of the ICC in general stipulates that:
“The termination terms are considered always included in a mutual agreements, if one party does not fulfill its obligations. In such case, the agreement is not null and void butthe cancellation must be requested from the court”
Based on the provisions above, if it is not clearly regulated within an agreement, the terms of agreement termination should be contained in the agreement, and in the event that such agreement states that force majeure is a reasonable ground for the termination of the agreement and the conditions have been fulfilled, the agreement termination is not necessarily deemed to be null and void, but such termination must be requested to court.
However, if the parties in the agreement agreed otherwise in their business contract, and waive Article 1266 of the ICC mentioned above in the event of a force majeure, and the agreement contains clause such as:
“The parties hereby agree to waive Article 1266 of the Indonesian Civil Code, and if a force majeure situation occurs, the Parties may terminate the agreement based on mutual agreement”
Thus, the agreement containing the clause as above can only be terminated earlier based on the mutual agreement of the parties.
This Article is generally made for the purpose of ANR Law Firm publication only and should not be treated as legal advice for your legal problem. Shall you have any further questions regarding this topic, you may contact the Advocate who authored this article at email@example.com.
Author: Nabawi, S.H., and Clara Angela Agnes Sipangkar, S.H., M.H