12 August 2020

Is The Covid-19 Outbreak Considered As a Force Majeure?

Another regulation related to COVID-19 outbreak has been issued. This regulation may give rise to assumptions that such outbreak can automatically be considered as force majeure.

| Karen Mills and Margaret Rose

The Indonesian Government has recently issued another regulation related to the Covid-19 outbreak. The issuance of Presidential Decree Number 12 of 2020 Regarding the Stipulation of the Covid-19 Outbreak as a Non-Natural National Disaster, has given rise to a number of assumptions that such outbreak may automatically be considered as a force majeure event, excusing either party from fulfilling its obligations under most contracts/agreements.

As stipulated in the Indonesian Civil Code, events which can be interpreted as those of force majeure must satisfy certain requirements, inter alia, the following: (i) the event must be  unexpected; (ii) preventing one or both parties from fulfilling its obligations; (iii) where the inability of the party claiming force majeure to perform its obligations was not caused by such party, (iv) nor can such inability be charged or attributed to such party.  

Considering the (now broad) possibility of a force majeure event occuring, and in order to obtain legal certainty,  prior to entering into an agreement the concerned parties normally will include a specific clause regarding force majeure in their agreement, which will supplement that provided in the law.  A normal such clause might include such events as: acts of God (such as, but not limited to: fires, explosions, earthquakes, drought, tidal waves and floods); war, hostilities (whether war be declared or not), invasion, act of foreign enemies, mobilization, requisition, or embargo; rebellion, revolution, insurrection, or military or usurped power or civil war; contamination by radio-activity from any nuclear fuel, or from any nuclear waste from the combustion of nuclear fuel, radio-active toxic explosive, or other hazardous properties of any explosive nuclear assembly or nuclear component of such assembly; riot, commotion, strikes,  slowdowns, lockouts or civil disorder, unless solely restricted to employees of the party supplier or of his subcontractors; acts or threats of terrorism; or other unforeseeable circumstances beyond the control of the parties against which it would have been unreasonable for the affected party to take precautions and which event could not have been avoided by using best efforts.   In addition to defining events that will be considered as a force majeure, most clauses would also include some reference to the legal effect of a force majeure.

Until now, few, if any, such force majeure clauses specifically include "pandemic" or "plague"  as an event defined as force majeure.  One of the covered events of a force majeure, as stated above, “unforeseeable circumstances beyond the control of the parties …” would have been intended to broaden the scope of what can be considered force majeure beyond those specifically listed.   The question that is being faced today is whether such broad scope of the force majeure event may or may not allow the Covid-19 outbreak to serve to excuse either party from performing its obligations arising under their underlying agreement.

But in addition to the event having happened, the party seeking its performance to be excused must also establish that its failure to perform was a direct result of, or actually caused by, the occurrence of the force majeure event.

The stipulation of the Covid-19 status as a non-natural national disaster, even if intended to be covered under the broad interpretation of “unforeseeable circumstances beyond the control of the parties", does not automatically excuse every party bound in an agreement from performing its respective obligations under that agreement. Whether this pandemic can be held to excuse such performance will depend upon the language of the specific provisions, terms, and conditions stipulated in the subject agreement itself and whether the event, in fact, did prevent such performance.  

For example, if a debtor claims that the failure to repay his/her loan instalments as scheduled was due to a force majeure event, specifically the Covid-19 outbreak, due to the Government's instruction of Social Distancing, it should be clear that such a claim cannot be justified.   Social Distancing does not in fact prevent a party from making a payment.  The debtor can wire his/her payment through internet banking. 

On the other hand, if one party has the obligation to travel abroad to perform its work, or to import a number of workers from abroad, or even elsewhere in Indonesia, to perform, say, a construction contract, indeed the travel restrictions currently in force in almost every country, including Indonesia, would certainly prevent such obligation to be performed.

Based on the unique character of every agreement and the actual circumstances contained therein, the Covid-19 status as a non-natural national disaster is unlikely to automatically be considered as a force majeure event to excuse the parties from performing their obligations under every single agreement.   This would particularly be true if the obligation were to make a payment, or, say, maintain insurance coverage against a risk that might otherwise fall within the force majeure provision.    Such activities are not in fact prevented by the pandemic nor by government restrictions made to seek to protect the population in such cases.   

Thus each case must be carefully analysed and considered on its own facts, and it simply cannot be assumed that this, or any, pandemic can be claimed to excuse any kind of performance, even if financially difficult for the party.     Of course, counsel may wish carefully to consider the language of force majeure provisions in future contracts and, if possible, specifically include such a pandemic, or plague, as such an event, if appropriate.   Of course, that will not, however, help parties to existing agreements.


More Newsletter

LAPS-SJK is an independent alternative dispute resolution body to provide integrated services to assist in the resolution of commercial disputes within the Indonesian financial service sector.
The Ministry of Trade issued Regulation Number 05 of 2020, revoking a previous regulation on electronic cigarettes import.
For parties with potential success in arbitration, third party funding may be the option to avoid the fronting of high legal fees and costs in time of Covid-19.