The World Health Organization on Wednesday, March 11, 2020, declared that COVID-19 is a pandemic. Business is most likely to experience the effect. If a businessman cannot perform contractual obligations as a result of the COVID-19, force majeure clauses will be very important.
Definition of Force Majeure Event
The term “force majeure” has no certain and recognized definition under Indonesian Law. Article 1244 and 1245 of the Indonesian Civil Code only mention that a party may be exempted from its obligations in the event of an insistence or overmacht [Ind—keadaan memaksa]. According to the 2003 publication booklet of the International Chamber of Commerce, force majeure literally means “greater force”. It is similar to Black’s Law Dictionary, which defines force majeure as a superior or irresistible force (Emerig. Tr. des Ass. C.12). Meanwhile, according to the Cambridge Dictionary, force majeure is “an unexpected event such as war, crime, or an earthquake which prevents someone from doing something that is written in a legal agreement”. Typically, force majeure refers to an event beyond human control.
Interpreting the COVID-19 Pandemic as a Force Majeure Event
Parties need to figure out what is defined as a force majeure event in the agreement, whether a pandemic is included in the definition of force majeure event.
Force majeure clauses often include a specific list of events, or, if not, some force majeure clauses are drafted broadly, e.g. “or other similar causes beyond the control of the parties” or “any other reasons or causes which adversely affect the ability to perform its obligations under this agreement”. If so, a pandemic can be concluded and interpreted as a reason or cause beyond the control of the parties, affecting the ability of the parties to conduct their obligations under the agreement.
It is more assuring that if the agreement contains specific public health-related language such as “epidemic, plague, emergency or outbreak”, the COVID-19 pandemic is clearly covered in it.
However, many force majeure clauses only contain a very specific list of events. For example, it contains “any acts of God, natural disasters, floods, fires, wars, riots, civil commotion, natural catastrophes, strikes, acts of government (including but not limited to eminent domains or similar actions or proceedings)”. It also usually contains “change of law” but do not specifically include a pandemic as one of the force majeure events.
In Indonesia, the COVID-19 pandemic grows and spreads tremendously fast within days, especially in the capital city of Indonesia, Jakarta. The Indonesian government has urged everyone to stay at home or at least limit their activities in public areas. It aims to slow down the spread of the COVID-19, which is likely to lead the Indonesian government to rule out lockdowns. The Indonesian government has announced and issued several instructions in the form of strategic recommendation letters, circular letters and even regulations related to the COVID-19 pandemic.
As stated above, if force majeure clauses only contain a very specific list of events but do not specify an epidemic or a plague as one of the force majeure events, the affected parties can use the “Acts of Government” force majeure event as the underlying basis since the government is actively involved in restricting the mobilization of people as formulated in various regulations.
Remedial Mechanism due to COVID-19 Pandemic Outbreak as Force Majeure Event
The affected parties who seek relief from its obligations by using the COVID-19 as a force majeure event shall ensure the existence of specific wordings in the force majeure clause that can be interpreted to cover the COVID-19 pandemic as one of the force majeure events.
The wordings in the force majeure clause that can be used as an underlying basis are as follows:
(i) a broad force majeure event wording or “catch-all” wording; (ii) specific public health-related languages; or (iii) “Acts of Government”.
If there exists an event that falls within the relevant definition of force majeure event, the affected parties must demonstrate that the obligations under the agreement cannot be performed “by any means” because the COVID-19 pandemic is an unanticipated and unforeseen event.
Typically, the clause will provide that the parties’ obligations under the agreement will be suspended until such time as the force majeure event and its immediate effects have ceased, no longer preventing the performance of the agreement. The clause will also specify the remedial mechanism in the occurrence of force majeure events such as:
(i) the affected party shall notify the other party in verbal and in writing shortly within several days indicating the detail of force majeure event;
(ii) the affected party may request an extension of time to be able to delay their obligations or to renegotiate the terms;
(iii) the affected party who seeks relief from performance shall be required to show that; (a) it was prevented, hindered or delayed from performing its contractual obligations as a result of the event; (b) the event/inability to perform was beyond its control; and (c) there were no reasonable steps the party could have taken to avoid the event or the consequences.
There might be a force majeure clause which contains that if the impact of the force majeure event is not lifted within a certain time, for example, 6 or 12 months (prolonged force majeure), then the parties will have the right to terminate the contract. However, in practice, there must be a risk allocation in the form of insurance protection if a force majeure event occurs.
It can be concluded that a force majeure event will always be highly dependent on the wording of the relevant agreement. If the affected party fails to prove that the inability to perform its contractual obligations is resulted from the COVID-19 as a force majeure event, such a case can lead to a breach of contract which results in commercial indemnity.
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This publication has been prepared by Aditya Yudhistira for general informational purposes only to provide clients with information on recent legal developments and is not intended as legal advice or opinion.