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COVID-19 as a basis for Force Majeure Application from Indonesia Law Perspective

by Clara Viriya (clara.viriya@launcher.id) and Alifia Putri (alifia.putri@launcher.id)

Since the first COVID-19 case was confirmed in Indonesia in the early of March, over 9000 people in Indonesia have confirmed positive cases of COVID-19. In April, Indonesia became the nation with the most deaths in ASEAN, but there are early signs that the Indonesia death counts may be levelling off, as the growth of new cases and deaths plateaus. The pattern isn't consistent across the city, as new hot spots emerge and others subside.

In the middle of the unpredictable situation, business actors are advised to consider carefully the effect that their company is likely to have and to take constructive and protective steps to minimize predictable risks.

Failure to fulfil an arrangement or contract in a business setting can also be justified by law if a person who fails to fulfil an accomplishment may show that an unavoidable obstacle exists. For example, a natural disaster. In relation to the COVID-19 outbreak, should the global pandemic be used legally as a reason for not enforcing the agreement as a force majeure? Is it a must to determine a national tragedy so that the COVID-19 incident can be named force majeure?

What is Force Majeure under Indonesia Law Perspective?

A condition of force majeure is not merely a condition which occurs for the sake of the contract, but for the sake of the law itself. The legal framework is specifically provided for in Article 1244 and 1245 of the Civil Code (BW) and is included as part of the Civil Code Book III which is complementary to the agreement.

In Article 1244 of the Civil Code, it stipulates that in the event of debtors are unable to carry out their obligations, the debtors must prove that the failure to carry out the obligation was caused by an unexpected event and without being based on bad faith. Therefore there are elements must be fulfilled in the event a party in an agreement is unable to carry out its obligations based on the provisions of Article 1244 and 1245 Civil Code: 1) caused by an unforeseen event or an unexpected event; 2) it shall be proven by the party experiencing it; and there is no bad faith. The validity of Articles 1244 and 1245 of the Civil Code applies generally, which means that if the parties to an arrangement do not control force majeure in their legal relationship, the force majeure clause shall apply automatically as long as the parties do not waive it.

Force Majeure has two sections, general and specific. General force majors are related to God's act, while specific force majors are related to human’s act. Since the Indonesian Government issued the regulations in the case of the COVID-19 pandemic, the COVID-19 sense force majeure was placed in a special category (human act). Further, it is also known for case of position of the force majeure, there is absolute force majeure which includes the impossibility. Events which totally negate the ability of the parties to accomplish their agreements, such as the destruction of buildings used as collateral for natural disaster contracts. Secondly, relative force majeure which includes the difficulty in it, changing circumstances but there are alternatives that can be substituted, compensated, postponed, and so on. In this case, COVID-19 may be deemed relative force majeure since it still can be done even if it is difficult or need more effort to fulfil such agreements.

Force majeure cannot be used automatically as a justification for cancelling the contract even because force majeure relies on the substance of the contract clause. That is, it needs to be seen first if there is an understanding in the contract provision that the terms of the contract can be changed if a force majeure happens.

Force Majeure Application in the COVID-19 Havoc

As is known, the legal basis for force majeure namely Article 1245 Civil Code regulates that the compensation of loss and interest costs can be forgiven when a forceful situation occurs. Many experts and practitioners are of the view that Article 1245 of the Civil Code can be used as a legal basis for the application of force majeure even though this clause has not been regulated in an agreed contract. But this does not mean this Article 1245 of the Civil Code alone is appropriate, the parties to the case must be able to show that there are barriers to their achievements result in force majeure immediately, unless the situation is absolutely unlikely, such as for example, the business closure.

As long as an achievement is still feasible, even though it is very complicated and burdensome, then force majeure cannot be said to be so. The theory of suffering or rebus sic stantibus (hard conditions/shifting circumstances) should be valid for this situation. However, the problem is that Indonesian law does not recognize hardship or rebus sic stantibus, the Civil Code only recognizes the term force majeure.

In a situation like this, it takes good faith of all parties to make every effort that produces a win-win solution. It is the truth of good faith that will later be tried in court because there is indeed a type of debtor who really cannot pay in this forceful condition, but there are also debtors who can actually pay but are not willing to pay. Further to be granted in court, the reason for the force majeure submitted must be accompanied by adequate evidence, such as what are the real consequences experienced by the debtor in the force majeure.

The government issued Presidential Decree No. 12 of 2020 was not intended at all and indeed could not make COVID-19 as a direct reason to cancel or terminate the contract. However, the parties must use the principle of good faith (Article 1338 of the Civil Code) to renegotiate contracts, both in the form of rescheduling, restructuring, or reconditioning. The agreed renegotiation results can be stated through the contract addendum. The consequences of cancelling the agreement due to force majeure can only apply if the parties have included a contract cancellation clause as a result of force majeure in the agreement they have agreed to. If cancellation is not regulated in the contract, then the postponement will apply.

If force majeure can be a reason for someone's release from the obligation to fulfil their responsibilities in accordance with what was agreed upon, of course, losses from various business sectors are inevitable. The question is, should the business actors bear the risk of loss by himself or does the law provide more ideal compensation opportunities?

In principle, whoever makes a mistake or negligence, he will bear the risk of loss in a contract. Another case with the COVID-19 pandemic that has been agreed as a disaster outside the will and ability of humans. The context of reducing the loss in pandemic conditions must still firstly refer to the form of the agreement. If it is not specifically regulated, all parties involved in the transaction must bear the risk, in the agreed fair proportion.

How to Identify If COVID-19 Can Be The Reason to Terminates Contract?

Before deciding to terminate the agreement as a result of the COVID-19 event, please take a look at the agreement clauses first. Is “Pandemic” or “Disease” or “stipulation of disaster status by the Government” is one of the events in force majeure clauses? The next question, is the obligation to fulfil the contract really hindered or cannot be implemented due to COVID-19? As already stated, the COVID-19 event is a relative force majeure event. Not all contracts are affected (or perhaps slightly affected but can still be executed) by COVID-19. If you are certain that your contract is one of those affected by the COVID-19 issue, you may terminate the contract with the record that the termination shall be agreed by all parties in the agreement. Please consider carefully, whether your contract shall be terminated upon COVID-19 or you can simply substitute, compensate, postpone, or any other type of contract restructuring.

In conclusion, COVID-19 might be the reason to re-negotiate your contract, but that does not mean that COVID-19 could necessarily terminate or amend your contract without the parties’ mutual consent, so does the Presidential Decree No 12 of 2020.

Jurisprudences related to Force Major Application

Some court rulings have upheld the principle that assessing the existence of a force majeure incident that affects the execution of an agreement should be determined on a case-by-case basis, taking into consideration the features of each agreement and circumstances.

In Supreme Court Decision No. 409K / Sip/1983, the Judges Panel ruled that the defendant, a shipping company PT Gloria Kaltim, failed to deliver the belongings of the plaintiff Rudy Suardana, since the defendant's ship carrying the property of the plaintiff had sunk due to massive waves, could not be regarded as the defendant's fault, because it occurred because of an unexpected case.

Further, the economic crisis in 1998, the collapse of banks and funders as shreds of evidence that the defendant was really unable to complete the construction of the building, specifically Gedung Menara Gas Pertamina project construction as ruled in the Central Jakarta Court Decision No. 237/Pdt.G/2003/PN.Jkt.

From the given above cases, it can be seen that an incident can be called a force majeure as long as it can be proven before the agreed jurisdiction by the parties.

LID Advisory is a publication prepared by Launcher.id. It is intended to inform in general topics covered only, and should not be treated as a legal advice or relied upon when making business activities or investment decisions. Should you have any inquiries on the matters contained in LID Advisory, or other comments generally, please contact us at contact@launcher.id.