Does Covid-19 Outbreak Excuse Performance of Obligations?
With the outbreak of the novel corona virus disease (now known as the “Covid-19”) and the restrictions or limitations imposed by Governments in various countries, it is imperative for Indonesian companies to revisit all of their agreements to ensure if the companies have any valid excuse for non-performance of their obligations under the relevant agreements.
This Brief provides a general guidelines on non-performance of agreements due to unforeseen events and force majeure under Indonesian laws. Please note that this Brief shall not be considered legal advice in any particular circumstance. Legal advice must be sought for any particular circumstance.
Indonesia is a civil law jurisdiction. So, all the rules and regulations are codified, including the rules and regulations on agreements or contracts.
The provisions on agreements (including excuses for non-performance of agreements) are primarily governed in the Indonesian Civil Code (the “Code”) that we inherited from the Dutch when Indonesia became independent in 1945. There are certain laws and regulations that may be relevant to specific agreements or contracts such as construction services contracts, employment contracts, and the like. We do not discuss these specific agreements in this Brief.
- Certain Principles under the Code
Freedom of Contract
Under Article 1338 of the Code, parties are free to determine their rights and obligations in an agreement (subject to applicable laws and regulations and norms and customs), including the provisions relating to non-performance of obligations under the agreement. So, parties are permitted to set out any and all provisions regarding non-performance of obligations and the excuses therefor.
In addition to the above, Article 1338 of the Code expressly provides that an agreement may not be withdrawn or amended without the consent of the parties thereto.
Article 1342 of the Code provides that if a provision of an agreement is clear and express, no parties are allowed to interpret, or depart from, such provision. So, if the wording of an agreement is clear and express, no party is allowed to interpret or depart from the meaning of such wording.
- Excuses of Non-Performance; Unforeseen Events and Force Majeure
Under Article 1244 of the Code, a force majeure may be an excuse for non-performance under an agreement. Below is an unofficial translation of Article 1244 of the Code:
“If there is any reason for such, is debtor shall be liable for costs, damages and interests if the debtor is unable to prove, that the non-performance or the late performance of such obligation, is caused by an unforeseen event, for which the debtor is not responsible and the debtor does not act in bad faith.”
Based on the above, in order for a party to argue this Article the following elements must be met:
- the event is unforeseen and may not be predicted at the time the agreement is entered into;
- the event is not caused by the party; and
- the party acts in good faith.
In addition, Article 1245 of the Code provides that no liability arises if the non-performance is due to a force majeure or an accident so that (a) the debtor does not perform, or is late in performing, his obligation, or (b) the debtor performs an action that the debtor is not permitted to do. An unofficial translation of Article 1245 of the Code is as follows:
“The debtor needs not compensate for costs, damages or interests, if a force majeure or an accident prevented him from giving or doing an obligation, or because of such reasons he committed a prohibited act.”
The Code does not provide the definitions (or examples) of the ‘unforeseen event’ in Article 1244 of the Code, or the ‘force majeure’ and the ‘accident’ in Article 1245 of the Code. In general, however, it is understood that the elements noted in (i), (ii) and (iii) above need to be met to claim the ‘unforeseen event’ in Article 1244 of the Code, or the ‘force majeure’ and the ‘accident’ in Article 1245 of the Code. For the purpose of this Brief, all these events are called force majeure.
- Typical Force Majeure Events in Agreements
Normally, agreements will include or set out certain events to qualify as force majeure. As noted above, under Article 1338 of the Code parties are free to determine the types of force majeure. Force majeure events typically include wars, acts of God, riots, natural disasters, governmental acts, and so forth.
In any event, on the basis of Articles 1244 and 1245 of the Code, when a force majeure clause is not specifically provided in an agreement, a party should still be able to declare that it cannot perform its duties or obligations under the agreement on grounds of force majeure subject to the conditions set out in Articles 1244 and 1245 of the Code.
- Is Covid-19 a Force Majeure Event?
In our view, the Covid-19 outbreak is certainly unforeseen. No party is able (acting in good faith) to predict whether (or when) the Covid-19 is going to occur. So, if a party is prevented from performing its obligation under an agreement due to the Covid-19, and such party does not cause the Covid-19, and the party acts in good faith, such party should be able to claim force majeure. Accordingly, such party should be excused under Articles 1244 or 1245 of the Code.
Furthermore, any government acts following the Covid-19 (e.g., any lockdown or any travel restriction) which prevents a party from performing its obligations under an agreement, and such party does not cause the said government act, and such party acts in good faith, then such party should also be able to claim force majeure. Accordingly, such party should also be excused under Articles 1244 or 1245 of the Code.
However, if an agreement expressly excludes virus outbreaks or any pandemic or any Government action related thereto, then no party should be able to claim a force majeure event due to the Covid-19 outbreak. Consequently, the parties must continue to perform their respective obligations under the relevant agreements.
- What to do next?
We set out below the steps that a party should take in view of the Covid-19 outbreak in order to claim a force majeure event and seek an excuse for non-performance:
- To make a list of agreements of a party and to identify the obligations that the party has to perform thereunder and the deadlines for such performance;
- In consultation with the in-house counsel or an external counsel, to identify if there is any force majeure clause in the agreements, and to determine if there is any limitation of force majeure events;
- To immediately thereafter notify the other party or parties of any non-performance due to the Covid-19 if there are no limitations on force majeure events; and
- To take all actions to mitigate and reduce any loss to the party and the other party or parties.
March 24, 2020
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- March 24, 2020