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When contractual obligations breached under pandemic
A significant number of people become infected and even die from the spread of the novel coronavirus (COVID-19) every day
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A significant number of people become infected and even die from the spread of the novel coronavirus (COVID-19) every day. To minimize the spread of the disease, everyone has been urged to stay home.
The economy of China, where the virus was first detected, has suffered the most from the disruption of export and import activities due to COVID-19. Other impacts include the unofficial ban on imported products from China by Indian traders, the postponement of production and exports from directly affected companies such as automotive manufacturers in Wuhan city in China’s Hubei province and the temporary ban on imports of living animals from China by Indonesia since early February.
In response to the outbreak, China’s government offered support to Chinese companies facing these impacts to international trade. As Chinese exporters risked delaying or canceling the export and import of ordered goods, the government issued a force majeure certificate for impacted companies. The objective of issuing the certificate is to avoid potential claims filed by foreign counterparts of breaching contractual obligations. We aim to review these measures from the perspective of Indonesian law.
Indonesian law — under the Civil Code — defines a force majeure as an event beyond an individual’s control. In short, force majeure includes any damages arising from nonfulfillment or late fulfillment of contractual obligations due to unforeseeable circumstances outside the control of one of the parties, without any bad faith. If the party who experienced force majeure (defaulting party) proves that its default was due to a unforeseen event, the defaulting party may be exempted from responsibilities arising from the nonfulfillment of contractual obligations.
In principle, force majeure events comprise objective and subjective types. Objective force majeure emphasizes “absolute impossibility” to perform the obligation. An example includes an event in which the object of the agreement is destroyed, lost or delayed due to a natural disaster and/or the government’s sudden restrictions. If the defaulting party cannot perform its obligation to import or export goods due to an event beyond its control, it can be deemed as a force majeure event. Thus the defaulting party is not obliged to pay the claims or provide compensation to the non-defaulting party.
On the flip side, subjective force majeure focuses on “logical impossibility” to fulfill the obligation, such as the defaulting party’s best effort to perform obligations according to the agreement. Here the defaulting party shall take all reasonable steps to find a solution to perform its obligation even under an unexpected extraordinary event. Therefore, an event can be deemed as a force majeure if the defaulting party has taken all efforts and reasonable steps, but the force majeure conditions remain.
Based on the parties’ freedom of contract principle, the contracting parties may stipulate a specific definition of force majeure under the contract, such as epidemics, natural disasters and government regulations prohibiting trading activities under an agreements. On that note, if a pandemic is not included as force majeure under the contract, it may raise a risk dispute in interpreting the circumstances categorized as a force majeure event.
For instance, a non-defaulting party may claim that the epidemic is not a force majeure event as it is not clearly stated in the agreement, while a defaulting party may claim the epidemic causes an impossibility in performing its obligations under the contract. However, a settlement of the dispute will depend on the ability of the parties to prove whether an epidemic is truly the cause of the nonperformance of obligations and whether the parties have performed in good faith.
Nevertheless, if a dispute arises in the Indonesian court, it will be relatively straightforward to prove the force majeure event because the World Health Organization has declared the COVID-19 a pandemic and the National Disaster Mitigation Agency (PNPB) has declared a pandemic emergency status for the period of Feb. 29 to May 29. Given that, the defaulting party would likely be exempted from providing compensation to the non-defaulting party due to the nonperformance of obligations.
Furthermore, if such disputes reach the courts, Indonesian judges may take a broad approach to defining the force majeure event, not only from the agreement of the involved parties but also based on Indonesian law. As a result, if the judges deem that force majeure characteristics are not being met, then a defaulting party will be deemed as breaching the agreement.
Even under a pandemic, the judges could examine whether the defaulting party has done all it could to meet its obligations in good faith. If the judges rules the defaulting party’s efforts were inadequate or lacked good faith, the court could grant the non-defaulting party’s demand to terminate the agreement, pay the damages and/or force the defaulting party to perform the obligations regardless of the occurrence of a pandemic.
However, it would be advisable for the parties to settle possible disputes by promptly negotiating the agreement to find the best solution against a force majeure event, including extending the period for the fulfillment of the obligation under the contract.
In Indonesia, it is likely that a force majeure certificate issued by the Chinese government on the grounds of the WHO’s declaration of a pandemic and supported by the emergency status declared by the BNPB may likewise be valid as sufficient evidence to establish a force majeure event under Indonesian law.
However, even if a business contract has stipulated certain force majeure characteristics, Indonesian judges may still, under their discretion, examine closely all the evidence that shows whether the defaulting party has done its utmost to fulfill its obligations in good faith.
Additionally, as a preventive measure, the involved parties of such contracts should regulate the negotiation mechanisms in the contract clearly to immediately find a solution upon a possible dispute arising from a force majeure event.
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Lawyers in shipping and international trade (customs and excise), aviation, insurance and reinsurance at Budidjaja International Lawyers. The views expressed are their own.
