The COVID-19 global pandemic has caused significant disruptions to businesses globally. The rapid rate of transmission, the unchecked growth in the number of cases and the lack of a vaccine has forced governments around the world to implement policies that have disrupted business operations globally.
In Jakarta, Governor Anies Baswedan declared a two-week state of emergency, beginning March 20, later extended by two weeks, in an attempt to contain the virus. The Jakarta administration has urged all businesses and organizations to close their offices or at the very least reduce the number of employees working in the office.
These actions will likely, if they have not already, cause contracts, agreements and transactions to be delayed or cancelled. Whether due to travel and import restrictions, supply and demand issues, and/or a lack of human resources, more and more businesses are finding it difficult to continue to operate and meet their contractual obligations.
This raises a number of questions regarding COVID-19 and its impact on existing contracts. Can the defaulting party avoid liability? Will the contract be terminated? Will the obligations be suspended? How can parties to a commercial contract protect themselves during the pandemic?
This article discusses the repercussions of COVID-19 on contracts in Indonesia, the concept and implementation of force majeure clauses, and the ability of defaulting parties to avoid liability.
What Is Force Majeure?
Force majeure clauses are contractual clauses that alter parties’ obligations and/or liabilities under a contract in the event that an extraordinary event or circumstance beyond their control prevents one or more of the parties from fulfilling those obligations.
Under Indonesian law, the concept of force majeure is mentioned in Articles 1244 - 1245 of the Indonesian Civil Code (ICC). These articles provide that a defaulting party (obligor) is liable for compensation for costs, losses and profits for non-performance or the late performance of a legal obligation under a contract, unless they can prove that such non-performance or delay is caused by something which is unforeseen, for which they cannot be held responsible, even in the absence of bad faith on their part, and/or fulfilling such obligation would be deemed as committing a prohibited act.
In light of the above, one may surmise that in order to constitute force majeure that may exempt the defaulting party from liability for compensation, the following elements must be met:
An unexpected event/circumstance.
Circumstances beyond the defaulting party’s control.
The defaulting party is not accountable for the event/circumstance.
The event/circumstance could not be anticipated/avoided by any of the parties.
The situation prevents the defaulting party from performing its obligations.
The performance of the obligation would be prohibited.
There is no bad faith from the defaulting party.
No intention of the defaulting party to default.
If the contract provides a detailed force majeure clause, the terms of that clause will generally prevail. Indonesian courts will likely enforce the clause written in a contract agreed between both parties on the twin principles of sanctity and freedom of contract.
Force Majeure Clause in a Contract
The drafting and construction of a force majeure clause is to be negotiated between the parties to the contract. However, the parties should consider including these components in the clause:
A clear description of what matters constitute a force majeure event. In order to accommodate an event such as COVID-19, wording such as “pandemic” or “outbreak” should be included. General examples will likely give rise to debate as what may or may not qualify as a force majeure event.
The consequences of the occurrence of a force majeure event. Parties should clarify the impact on the agreement should a force majeure event occur. For example, will it delay the object of the agreement, or terminate it, and who will be liable for any costs incurred as a result of the force majeure.
Procedures to be taken upon the occurrence of a force majeure event. For example, parties may choose to regulate that the party invoking force majeure is obliged to notify the other party of its intention and include a description of the impediments it is facing.
The party invoking the force majeure clause shall prove that it has exhausted the necessary and reasonable measures to mitigate the damages brought upon the occurrence of the force majeure. This can be included to protect the other parties to the contract and ensure that the force majeure directly impedes the performance of the agreement and is beyond the control of the parties.
However, regardless of whether a contract contains a force majeure clause, force majeure can still be applied by reason of law. Indonesian civil courts can determine whether force majeure has happened and whether it should preclude the defaulting party from all liability. Non-performance may still be excused if a company successfully argues in court that COVID-19 is a force majeure event and is able to prove that there is a direct causal link between the COVID-19 pandemic and its non-performance.
Is COVID-19 a Force Majeure Event?
In order to determine whether COVID-19 constitutes a force majeure event, a detailed analysis of the specific contractual clause is required. The following questions should be considered:
What events are listed as force majeure events in the contract?
Are the words “pandemic” or “disease” included in the above list?
Has COVID-19 rendered it impossible for the party to fulfill its obligations under the contract?
What is the impact on the party invoking the force majeure clause?
If the force majeure clause does not refer to specific events, the parties may need to rely on general contractual terms and evaluate whether the effects of the COVID-19 pandemic fulfill the elements of a force majeure event and have resulted in the defaulting party being unable to meet its contractual obligations.
One may certainly argue that the pandemic is an unexpected event beyond the control of the parties that could neither have been anticipated nor avoided. And it can certainly be regarded as an impediment to business operations worldwide.
Nonetheless, it may be difficult to use COVID-19 to claim force majeure in the absence of decisions or policies from local, provincial or national authorities that have created such impediments to business operations. An example would be government-ordered travel restrictions, quarantines, office closures or a citywide lockdown. If the government orders companies to halt business operations and workers to stay home to check the spread of the virus, this may result in various failures to perform contractual obligations.
Once proven that these measures prevented performance, the defaulting party’s argument for COVID-19 as a force majeure event would in these circumstances be difficult to dispute. But in the absence of any such government policies, regulations or orders, it is difficult to determine when exactly COVID-19 may be categorized as a force majeure event.
What Must Be Shown to Invoke Force Majeure?
Regardless of whether pandemic is included in the contract as a force majeure event, the party claiming force majeure will want to show that any failure to perform its contractual obligations was beyond its control and that it could not have otherwise prevented or mitigated the damage from such failure.
The party claiming force majeure should ideally show:
The inability to perform the obligation was directly caused by the pandemic.
Its non-performance was beyond its control.
There were no reasonable steps it could have taken to avoid the non-performance and/or mitigate the damage.
Although it is not specifically mandated by the abovementioned articles of the ICC, the party seeking to invoke force majeure for non-performance must still take reasonable steps to mitigate the foreseeable damages brought about by the non-performance, to strengthen its case in legal proceedings. In this regard, companies should ensure that all the impacts of COVID-19, as well as the companies’ actions in response to such impacts, are documented. These records may be crucial to support the claim that the company took steps to mitigate the damages in the event of non-performance.
We also encourage all businesses looking to invoke force majeure to show that they are still acting in good faith by complying with all the other requirements of the contract.
As mentioned above, a well-drafted force majeure clause in a contract will also require the party invoking force majeure to comply with specific procedures upon the occurrence of a force majeure event. For example, contracts often require parties to provide notifications or updates to the other party, including at the commencement and conclusion of the force majeure event. In this regard, the defaulting party should give the other party notice of its situation, describing the impediments it is facing and expressing its intention to invoke the force majeure clause.
The impact of invoking the force majeure clause depends on the contract. It will generally excuse the invoking party from performing its obligations under the contract, provide the invoking party additional time to perform its obligations or give one or both parties the option to terminate the agreement. The clause may also allocate liability for increased costs arising during the continuation of the force majeure event.
Impact of COVID-19 on Indonesian Courts
The outbreak has delayed and/or suspended operations for not only businesses but also government institutions and agencies, including court tribunals. The Indonesian Supreme Court recently issued Circular Letter Number 1 of 2020, dated March 23, 2020, giving court tribunals the discretion to determine any postponement of hearings or restrictions on visitors attending hearings. Parties in civil, religious and state administrative proceedings are encouraged to utilize the e-litigation application system the courts recently introduced (E-Court). Several courts in Indonesia have announced that they have postponed proceedings for two weeks to accommodate the Government’s efforts to battle the COVID-19 outbreak.
The Supreme Court recently issued Letter No. 379/DJU/PS.00/3/2020 dated March 27, 2020, to allow trials for criminal cases to be held by teleconference.
Practical Steps for Businesses Affected by COVID-19
There is no doubt the COVID-19 pandemic has presented unprecedented challenges and impediments to businesses in conducting their normal operations. It is imperative that businesses enact policies and measures to protect themselves during this time. We suggest several measures companies can take in this situation.
Review all business contracts and identify what events are regulated as force majeure and the remedies provided in the event of force majeure, as well as the requirements to invoke force majeure if business operations are disrupted by the effects of COVID-19.
Companies should identify and assess the consequences of the non-performance of all their valid contracts.
Identify any notification requirements. Some contracts require parties immediately to notify the other parties of their intention to invoke force majeure, or at the very least to inform the other parties of any change in their business operations.
Businesses should ensure they have taken reasonable steps to avoid non-performance or to mitigate the damages brought about by the non-performance.
Assemble and retain all documentation pertaining to the impact of COVID-19 on business operations and the measures taken by the company in response to such impact.
Include wording or provisions on infectious disease/pandemic in new contracts and amend existing contracts if possible.
Continually engage and communicate with workers regarding updates on the pandemic.
Create a policy for the foreseeable future (for example, a work from home policy in the event of a lockdown) and provide adequate training for workers in an effort to prevent business operations from being severely impeded.
Check insurance arrangements, including whether the business is covered in the event of non-performance as a result of a pandemic.
Conduct risk assessments.
Ensure proper training and provide information and education on the virus for workers.
To anticipate the non-performance of a contract, we strongly recommend businesses prepare to invoke and/or defend themselves against force majeure clauses used to excuse non-performance.
If the contract drafting around force majeure is not detailed, or if the factual basis for the claim is weak, it would be wise for the defaulting party to communicate with the other parties in the contract in an effort to reach an amicable settlement and avoid litigation.