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Is Covid-19 a Force Majeure Event

An Analysis of Force Majeure in The Middle of The Covid-19 Pandemic

16 April 2020
The global outbreak of Covid-19 pandemic has become a serious issue, which has greatly affected the world economy, including Indonesia. Further, since 13 April 2020, the Indonesian government has issued Presidential Decree No. 12 of 2020 which determined the Covid-19 pandemic as a National Disaster. In an effort to curb the spread of the said virus, the Indonesian government has also adopted numbers of policies that emphasize 'physical distancing' such as the Large-Scale Social Restrictions ("PSBB"). These policies, inevitably, have suppressed business opportunities and business activities, which if continued for a long time could threaten the business existence of business actors.
 
The threat to business continuity is clearly illustrated by the statement of the Chairperson of the Indonesian Entrepreneur Association (Asosiasi Pengusaha Indonesia or APINDO) Sutrisno Iwantono, who stated that with the current economic situation and based on their financial securities, many business actors will only survive for another 3 months, or until June 2020[1].  Revenue from businesses is deemed very minimal caused by the decline in business transactions, so some business actors choose to close its business to reduce costs that will not be covered by the lack of income.
 
The lack of incoming cash flow will greatly affect the ability of business actors to fulfil certain obligations of their transactions and contract to the point of default. For example, payments for building leases, payment of credit instalments to banks, and other forms of obligations.
 
Business actors who are having difficulties fulfilling their obligations may be starting to explore the possibility of implementing Force Majeure to avoid their obligations. Such action is possible considering the Force Majeure is a general clause that is often written under a contract, and even required as a standard clause in certain business activities, such as Construction Services Agreements. Therefore, the current application of the Force Majeure has been widely discussed as an option for the relief of responsibility for the business actor amidst difficulties tackling the impact of Covid-19.
 
This article discusses several aspects that need to be understood in connection with the Force Majeure and its perspective based on Indonesian Law related to the Covid-19 pandemic.
 
What is Force Majeure?
 
In general, Force Majeure is often comprehended as an event that occurs beyond the will of man, which is unpredictable and unavoidable events that result in not being able to carry out an activity as it should. Etymologically, the Force Majeure or Keadaan Kahar in Indonesian is derived from the word Kahar which based on the Indonesian Dictionary means omnipotence (the nature of God). In legal terminology, Keadaan Kahar is used to translate the term ‘Force Majeure’, a French term meaning “greater power”.
 
Force Majeure is one of the most common provisions to be drafted under a contract. In fact, for certain sectors such as construction, based on Law No. 2 of 2017 concerning Construction Services (“Construction Law”), it is mandatory to include Force Majeure provision as a standard in Construction Service Agreements, describing events which occur beyond the will and ability of the parties that cause harm to either party. Although there are no conditions which can be categorized as a Force Majeure, the Construction Law stipulates that in a compelling situation, the parties cannot carry out their rights and obligations and the risks resulting from such conditions can be promised by the parties.
 
The Force Majeure provision are formulated under a contract in the hope of providing a clear understanding to the parties regarding the conditions classified as Force Majeure, and its consequences for the parties.
 
How is Force Majeure regulated under the Indonesian Law?
 
In general, a contract and its implementations under Indonesian law are regulated in the Civil Code.  Although the Civil Code does not explicitly define the meaning of Force Majeure, however, the Force Majeure can be construed from the performance of obligations based on Article 1245 of the Civil Code, which stipulates that the debtor is not obliged to compensate for costs, losses or interest, if due to a coercive situation (Act of God) or because things that happen by coincidence, the debtor is prevented from carrying out his obligations.
 
In the absence of a clear definition of Force Majeure, the term “coercive situation” in Article 1245 of the Civil Code is often referenced and translated as Force Majeure.
 
A coercive situation and things that happen by coincidence are two separate elements in Article 1245 of the Civil Code. Therefore, the fulfillment of one of these elements is considered sufficient to enact Article 1245 of the Civil Code. However, it should be emphasized that the word ‘coincidence’ needs to be associated with unexpected events that occur without being known or desired by the parties under the contract.
 
Furthermore, the application of Article 1245 of the Civil Code must also consider the requirements under Article 1244 of the Civil Code. The said article stipulates that debtors can be exempted from reimbursement of costs, losses and interest, where it is necessary to prove that the obligation has not been fulfilled:
 
(i) caused by something unexpected;
(ii) which cannot be guaranteed to him; and
(iii) there is no bad intention in him.
 
Based on the Article 1244 and 1245 of the Civil Code above, legal experts in Indonesia also provide further description and explanation regarding the definition of the Force Majeure itself. Prof. R. Subekti considers a Force Majeure situation as a situation where the debtor indicates that the contract was not implemented due to things that are completely unpredictable, and where he cannot do anything about the circumstances or events that have arisen unexpectedly[2].  Which means, the non-performance or delay in the implementation of the obligation is not caused by the debtor's negligence or error. Because there are no errors or omissions done by the debtor, the debtor should not be punished with sanctions that are threatened with error or negligence.
 
Another explanation was conveyed by Munir Fuady who used the term Force Majeure as a condition that prevented a person from carrying out his performance because of the unexpected conditions at the time the contract was made, the situation/event could not be accounted by the creditor because the debtor was not acting in bad faith[3].
 
We can conclude that the Force Majeure is a condition where the unfulfilled commitments is caused by an unexpected event and there is no bad faith to it, thus the condition cannot be accounted by it.
 
It should also be noted that in drafting a contract, Indonesia adheres the principle of freedom of contract, where each party can freely regulate the provisions to be included under the contract in accordance with its purpose and objectives, including regulating Force Majeure.
 
Indonesian Court Precedence on Force Majeure
 
To date, there have not been many issuances on court decisions that provide definitive interpretation or clear coverage of the Force Majeure situation. However, several decisions of the Supreme Court have described situations that are classified as Force Majeure as follows:
 
1. Non-fulfillment of the contract due to forced conditions and not due to debtor negligence (Supreme Court Decision No. 409 K / Sip / 1983);
2. There are no alternatives that can be legally conducted for parties affected by the Force Majeure to fulfill their contract (Supreme Court Decision No. Reg. 24 K / Sip / 1958);
3. The risk is unexpected, unknown beforehand, and not the fault of the parties in the contract (Supreme Court Decision No. Reg. 558 K / Sip / 1971);
4. Unable to meet obligations due to obstacles that cannot be overcome (Supreme Court Decision No. Reg. 15 K / Sip / 1957).
5. Administrative actions of the authorities, orders from the authorities, decisions, all administrative actions that determine or bind, or a sudden event that cannot be overcome by the parties of the contract (Supreme Court Decision No. Reg. 3389 K / Sip / 1984)[4].
6. Obstruction or prevention of performance in disasters or force is not default. (Supreme Court Decision No. 243 PK / Pdt / 2015).
 
Based on the description above, it can be understood that the court in Indonesia uses a case-by-case approach in each of its decisions regarding the Force Majeure. It should also be noted that court decisions in Indonesia are not bound by previous decisions and the jurisprudence is only a non-binding reference, so there are many possible interpretations and criteria for an event to be classified as Force Majeure. In making this decision, the judge did not necessarily declare the Force Majeure based on the situation, but also studied the contract made by the parties.
 
However, based on the judges’ considerations it can be concluded that if the elements below are fulfilled, then an incident should have been classified as a Force Majeure:
 
a) emergence of coercive circumstances, i.e. unforeseen circumstances by the parties and outside the authority of those who are obliged to make a performance;
b) the emergence of a forced situation is not due to mistakes or negligence of those who are obliged to make a performance;
c) the forced situation creates an adverse risk to the parties who are required to make a performance;
d) there is no alternative to carrying out the performance which is hindered in the forced condition.
 
In relation to government administrative actions, as explained in the Supreme Court Decision Reg. No. 3389 K / PDT / 1984 and Supreme Court Decision No. Reg. 24 K / Sip / 1958, these actions cannot always be used as an excuse to declare Force Majeure. In the ruling, Supreme Court judge argued that the issuance of a government regulation would not automatically result in an obligation which could not be carried out at all. In-depth analysis of the promised performances of each party is required and an understanding of how an administrative product can limit a party to carry out its obligations. In addition, related parties must be able to prove that the fulfillment of their obligations is something that cannot be prevented, which is not caused due to negligence or error as referred to in Supreme Court Decision No. 409 K / Sip / 1983.
 
Through Supreme Court Decision No. Reg. 558 K / Sip / 1971, those who declared Force Majeure were also required to prove that the events that occurred were not caused by their mistakes.
 
It should be underlined, that based on our observations, the main focus that becomes the court’s attention in deciding upon a Force Majeure situation is the performance promised in the contract. The judges do consider how the contract regulates the Force Majeure and consider the circumstances that occur. However, the emphasis of the judge's judgment will be more inclined to whether in certain situations a performance or obligation can be reasonably carried out or not.
 
Can the Covid-19 pandemic in Indonesia be categorized as a Force Majeure?
 
Determination of the Covid-19 pandemic as a Force Majeure cannot be separated from each respective contract. Considering that Covid-19 has been established as a pandemic, the contracts that have explicitly governed the pandemic as a Force Majeure are certainly no longer an issue.
 
The issuance of Presidential Decree No. 12 of 2020 has also caused the parties to be able to declare Force Majeure in contracts that include national disaster status stipulated by the government as a Force Majeure, by referencing to the Force Majeure elements in their respective contract.
 
However, if the Force Majeure clause of the contract uses ‘catch-all’ phrases such as ‘circumstances beyond the reasonable control of a party’, a deeper analysis is needed to determine whether the outbreak of the Covid-19 pandemic has met the elements of the Force Majeure and has had an adverse impact which are out of fair control and cannot be overcome by a party.
 
If we refer to the explanation of the elements of the Force Majeure state which has been explained previously, it can be illustrated that Covid-19 has fulfilled at least 3 of the Force Majeure elements, namely:
 
1. an unexpected situation;
2. does not constitute an error caused by a party; and
3. raises adverse risks.
 
When a party is prevented from carrying out its obligations, the key element that needs to be proven is the presence or absence of other alternatives for carrying out the performance. If we add to the elements in Articles 1244 and 1245 of the Civil Code, it will be important to prove the absence of bad faith in such situation.
 
The implementation of PSBB in several regions such as DKI Jakarta and some areas in Banten and West Java can also strengthen the basis to declare Force Majeure. The implementation of PSBB has been believed to have limited the activities of the public and business actors. If the impact of the PSBB restriction has prevented the business actor from carrying out his obligations, and it can be proven that in good faith he did not find other alternatives that can be taken to carry out his obligations, then the situation can be considered as a basis for declaring the Force Majeure.
 
Is the Force Majeure clause needed to declare Force Majeure?
 
The presence of clear provisions governing situation defined as Force Majeure will certainly facilitate the parties to determine Force Majeure, i.e., when PT Perusahaan Listrik Negara (Persero) utilized its Force Majeure clause in its contract which defined a pandemic as a Force Majeure to reduce its commitment to absorb natural gas from PT Perusahaan Gas Negara (Persero) Tbk[5].
 
However, even if the contract does not have a Force Majeure clause or the existing provisions are limited, Article 1245 of the Civil Code can be valid as long as the contract is subject to and regulated under Indonesian law with due regard to the fulfillment of elements based on Article 1244 of the Civil Code and Supreme Court jurisprudence.
 
What must be considered before applying the Force Majeure clause?
 
There are a few factors that must be kept in mind before applying the Force Majeure clause, including:
 
1. Proof
 
As previously explained, the burden of proof of the Force Majeure situation will be borne by those who declares the Force Majeure clause. Therefore, sufficient evidence must be prepared before declaring the Force Majeure clause. Furthermore, the evidence carried out/provided must also be adequate enough to clarify that the elements of the claimed Force Majeure have been fulfilled.
 
2. Notification
 
Procedures that need to be taken into account in the event of a Force Majeure is often already governed within the contract, for example by setting time limits and notifications obligations in facing Force Majeure. Therefore, it is important to pay attention to the procedures that have been agreed upon within the contract
 
Non-fulfillment of the obligation to follow the established procedures in connection with the implementation of Force Majeure may be categorized as having defaulted. Furthermore, even a delayment in giving notice, may be considered a violation of the contract.
 
3. Results of Enacting Force Majeure
 
Provisions regarding the consequences of the enactment of the Force Majeure in the contract must also considered. Generally, the consequences of the Force Majeure varies, for example:
 
a. the debtor is released from bearing the risks;
b. the debtor is released from the obligations to fulfill the contract;
c. the debtor cannot be burdened to compensate losses; or merely
d. postponement of the debtor’s obligations under the contract.
 
4. Mitigation of Losses
 
If the Force Majeure becomes a reason for the preventing of the implementation of the obligations of one of the parties in the contract, it is also necessary to consider the loss that would be suffered by the other party. Due to such, there must be close observation towards the provisions regarding the mitigation of losses in the contract, and whether the mentioned losses can be incurred in Force Majeure.
 
It should be noted, that for businesses that are interconnected with one another, where there are more than 2 connected business forms, the Force Majeure will cause a chain event if carried out by one of the business actors.
 
Comparison of other countries’ policies in facing the Covid-19 pandemic threat
 
The Singaporean government has recently implemented policies to suspend a number of creditor’s actions in regards to the non-performance of obligations in specific fields. Briefly, the main points of the regulation are as follows:
 
1. The possibility to temporarily exempt the inability to carry out contractual obligations in the event such material inability is caused by the Covid-19 incident. The nature of the temporary exemption is done by discontinuing legal action for certain contractual breaches for the next six (6) or even twelve (12) months; and
 
2. Temporary changes to bankruptcy and insolvency regulations to increase the debt threshold for closure or bankruptcy of a company and provide a safety net to enable business actors to continue their business even though technically, they are insolvent.
 
We have also found similar steps taken from several countries in Europe including France, Germany, Spain and Italy. We view these policies as the right step to respond to this current situation, considering that the Covid-19 pandemic possess the potential to cause many business actors to struggle in fulfilling their contractual obligations. This can also be seen as a form of the seriousness of the Covid-19 pandemic towards the continuity of businesses where it has now finally become an important matter for each respective government to regulate.
 
For Indonesia, until the publication of this article, we have yet to see any additional steps set by the Government aside from the relaxing of credit payments for Micro, Small and Medium Enterprises in certain sectors.
 
Is there any other solution besides applying the Force Majeure?
 
Business actors facing difficulties in carrying out their contractual obligations can also take the path of restructuring through renegotiating the terms of the contract with other parties. Restructuring can be in the form of rescheduling the fulfillment of obligations to the changing of conditions of the contract settlement.
 
Closing Remarks
 
Analysis of the contract and fulfillment of the elements of the Force Majeure is important before the party hindered from carrying out their duties claims Force Majeure.
 
In addition, the government’s actions to curb the spread of the Covid-19 pandemic (for example, the determination of this as a National Disaster and the application of the PSBB) which inhibits a party from carrying out its obligations in a contract can also be considered as a reason for Force Majeure.
 
It must be remembered that the contract constitutes as a form of a contract between parties. Therefore, to face such unforeseen circumstances like now, it is important to maintain good communication between parties. Communication is expected to provide the best solution in dealing with situations that occur.

If there are any queries with regards to how this may affect your business, please contact us for further legal consultation.
 
This information does not, and is not intended to, constitute as legal advice; instead, all information, content, and materials are for general information only
 
©2020. BE Partners. All Rights Reserved

[1] CNBC Indonesia, ‘Alarm Keras dari Pengusaha: Kami Cuma Kuat Sampai Juni’, [Online] accessed through, https://www.cnbcindonesia.com/news/20200406213517-4-150158/alarm-keras-dari-pengusaha-kami-cuma-kuat-sampai-juni

[2] R. Subekti. Hukum Perjanjian. (Jakarta: PT Intermasa, 1992), pg 55

[3] Munir Fuady. Hukum Kontrak (dari Sudut Pandang Hukum Bisnis). (Bandung: PT Citra Aditya Bakti, 2007), pg 113

[4] Rachmat S.S. Soemadipradja.  Penjelasan Hukum tentang Keadaan Memaksa. (Jakarta: Nasional Legal Reform Program, 2010), pg 115

[5] Kontan, ‘PLN: Kondisi Kahar Sesuai Dengan Perpanjangan Masa Darurat Bencana Corona’, [Online[ accessed through, https://industri.kontan.co.id/news/pln-kondisi-kahar-sesuai-dengan-perpanjangan-masa-darurat-bencana-corona, 9 April 2020.