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Force Majeure and Rebus Sic Stantibus Doctrine in times of Covid-19 Pandemic

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Through Presidential Decree (KEPPRES) No. 12/2020 concerning the Establishment of Corona Virus Disease (Covid-19) as Non-Natural Disaster, signed by President Joko Widodo on April 13, 2020, Covid-19 has just been declared as a ‘national disaster’. However, confusion has been raised over the legal consequences of the KEPPRES.

The most potential legal consequence that has been widely discussed in local media is whether the KEPPRES allows companies and business owners to claim Force Majeure? In which case, they are released from the obligations caused by the sudden arrival of an extraordinary event, which goes far beyond the control of the parties involved.

In this article, we will discuss Force Majeure and Rebus Sic Stantibus doctrine and their relation to this time of the Covid-19 Pandemic.

Can the Covid-19 Pandemic be qualified as Force Majeure?

Etymologically Force Majeure originated from French which literally translates as “greater force”, and “keadaan memaksa” or “keadaan kahar” in Bahasa Indonesia.

The Indonesian Civil Code (ICC) does not provide a definition of Force Majeure, but Article 1244 and 1245 stipulate general provisions of Force Majeure which principally exempt debtors from all costs, losses, and interest as long as the debtor can prove the occurrence of Force Majeure event. In Article 1244 it is explained that:

“In the case of there is a reason the debtor must be sentenced to compensate the costs, losses, and interest, if the party unable to prove, that the non-fulfillment or delay of the fulfillment of an obligation on time in accordance with the agreement, due to an unexpected event, in which such event could not be accounted upon the party, all of the aforementioned only if there is no malice intent of the party.”

Furthermore, in Article 1245:

“Any cost, loss, and interest shall not be compensated if due to a forceful condition (overmacht) or due to an unintentional situation, the debtor is unable to provide or perform something that is required, or due to the aforementioned the debtor has done prohibited acts.”

Therefore, an event is considered to be Force Majeure if it meets the following elements:

1. the performance of the agreement is not possible due to unforeseen circumstance;
2. the circumstance occurs beyond the fault of the debtor;
3. the debtor is not accountable for the circumstance.

The Force Majeure concept that applies in Indonesia, there are 2 theories of Force Majeure:

1. Absolute Force Majeure
When it is impossible for the debtor to perform its obligations, for example, because the object of agreement is destroyed or no longer exists.

2. Relative Force Majeure
When it is still possible for the debtor to perform its obligations but at very great sacrifice.

The distinction between absolute and relative Force Majeure lies in the degree of impossibility. If the impossibility is absolute, it is no longer open to the possibility of change, then it becomes a forceful situation for the birth of an absolute Force Majeure. This impossibility does not only apply to the debtor itself, but also the impossibility of anyone under these conditions.

If the impossibility is still open to possibility, despite the great sacrifice, then this is a relative Force Majeure. If this obstacle disappears or subsides someday, it is still possible that the previous non-performance is requested again to be fulfilled by the debtor, but this time the creditor is not permitted to file for compensation of costs, losses, and interest.

By looking at the Force Majeure elements, the Covid-19 outbreak can be categorized as a Force Majeure because the Covid-19 situation itself is an unexpected event that is beyond human control, the condition cannot be avoided and is not caused by the error/negligence of the parties.

Covid-19 Pandemic as Force Majeure Event

After the release of KEPPRES No. 12/2020, the establishment of the Covid-19 outbreak as a national disaster by the government can be qualified as Force Majeure but does not necessarily serve as a basis for obstruction of the performance of all types of agreements. Force Majeure must still be seen from the real conditions of obstacles that cause non-fulfillment of obligations in the agreement.

In the agreement, the parties generally agree on the limitations of Force Majeure events, if an agreement explicitly states that outbreaks or lockdowns are Force Majeure events, then Covid-19 Pandemic and lockdown by the government can be categorized as Force Majeure event.

If the agreement does not explicitly mention an outbreak or lockdown as a Force Majeure event, but there is a phrase “including but not limited” or a clause stating “other events beyond the ability of the debtor” and the like which in a manner explicitly or implicitly stated in the agreement, then the performance of the agreement must be put into account if the Covid-19 situation is really compelling so that the debtor cannot perform its obligations.

If the performance of the agreement is an obligation to pay debts, then an outbreak or lockdown cannot abort the debt payment obligation, because such obligations can still be fulfilled by transferring through ATM, mobile or online banking. If the performance of the agreement is in the form of an obligation to do something that cannot be replaced by someone else, for example singing in a concert, the singer can be exempted from carrying out the obligations as promised on the grounds of the disease outbreak.

Rebus Sic Stantibus doctrine

Rebus Sic Stantibus or complete doctrine is “Omnis convention intellegitur rebus sic stantibus”. Literally means that an agreement is valid if the conditions are still the same as when the agreement was made. This means that if conditions change, the agreement will no longer be valid.

Rebus Sic Stantibus is regulated in The UNIDROIT Principles of International Commercial Contracts (UPICC), based on Article 6.2.2, the elements are:

1. the occurrence of events fundamentally alters the equilibrium of the contract either because the cost of a party’s performance has increased or because the value of the performance a party receives has diminished
2. the events occur or become known to the disadvantaged party after the conclusion of the contract
3. the events could not reasonably have been taken into account by the disadvantaged party at the time of the conclusion of the contract
4. the events are beyond the control of the disadvantaged party
5. the risk of the events was not assumed by the disadvantaged party

Rebus Sic Stantibus practice during the Covid-19 Pandemic

The embodiment of the Rebus Sic Stantibus principle in Indonesian positive law, so far only regulated in article 18 of Law No. 24 of 2000 concerning International Treaties which state that “international treaties end if there are fundamental changes that affect the implementation of the agreement”. In Indonesia, as a country that implements legal security, it implements absolute Pacta Sunt Servanda with only exclusion if there’s an impossibility to fulfill the performance of an agreement. Thus, Rebus Sic Stantibus is not recognized by the ICC.

Like the case of Force Majeure, if in the agreement explicitly stated elements or criteria of Rebus Sic Stantibus, then the provision binds the parties as to the law. As a result, Rebus Sic Stantibus provides the disadvantaged party the right to demand renegotiation of the agreement. However, if it is not stated in the agreement, then laws and propriety shall prevail.

Similarities and differences between Force Majeure and Rebus Sic Stantibus/Hardship

On the similarity, Force Majeure and Rebus Sic Stantibus both are unforeseen and unexpected events to occur when the agreement is agreed upon, they occur beyond the debtor’s errors and risks.

With Force Majeure, the debtor is excused from performing its obligations due to an unforeseen circumstance, which if It’s forced to continue performing its obligations, then it will face severe conditions due to physical and law obstructions. Thus, the obstruction on Force Majeure must not be due to economic reasons. Physical obstruction, for example in the form of natural disasters, that cause the transportation routes disrupted and goods cannot be delivered on time. While law obstruction meant, for example, occurs because of a sudden amendment of regulation that is related and is the basis of the contract. Say for instance, at first the object of the agreement is legal to be traded, but then declared illegal by such regulation.

Force Majeure essentially does not make economic difficulties as an excuse, for example because debtors are in debt or even bankrupt.

However, the Rebus Sic Stantibus principle allows economic constraints to be used as a basis of non-performance. This reason is acceptable, for example, the debtor cannot fulfill the performance of the contract due to the contents of the agreement itself is already burdensome economically with a very heavy interest expense.

The establishment of the Covid-19 outbreak as a national disaster by the government may be qualified as Force Majeure but it cannot automatically be used as a basis for the inability of a party to fulfill its obligations. It is necessary to prove that the inability of a party to perform its obligations is directly caused by the Covid-19 Pandemic.

As for the Agreement made prior to the Covid-19 Pandemic, if there’s clause stipulates that an outbreak (Pandemic Covid-19) and closure of access by the government (lockdown) as Force Majeure, the Covid-19 Pandemic can be used as the basis for the inability of a party to perform its obligations. Similarly, if in the agreement explicitly stated elements or criteria of Rebus Sic Stantibus, then the provision binds the parties as to the law. As a result, Rebus Sic Stantibus provides the disadvantaged party the right to demand renegotiation of the agreement. However, if it is not stated in the agreement, then laws and propriety shall prevail.

FMB & Partners Law Firm assists clients with various legal issues that arise in operating business on a daily basis including providing legal advice, due diligence, and creating legal documentation. Contact us for e-commerce and technology company legal service and other legal services at +62 21 5082 0033 or mail to mey@fmbpartner.com

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