Newsletter - Corona Virus Disease-19 (“COVID-19”) Pandemic as Force Majeure in Indonesia?
Author: Commercial Dispute Resolution Practice Group
The pandemic of Corona Virus Disease-19 or generally known as COVID-19, has significantly affected all of the business sectors in Indonesia. This situation interrupt most of all business sectors, and affects business actors which are struggling to maintain their business operation. Some business actors are being forced to close temporarily or even permanently. This situation affects the increase of companies that went bankrupt or applying for the Postponement of Debt Payment Obligation (PKPU) to Commercial Courts to restructuring their company financial.
- BUSINESS UNDER COVID-19 INFLUENCE (STATISTICALLY)
COVID-19 impacts almost all business sectors in Indonesia, based on the data provided by the Central Bureau of Statistics (Badan Pusat Statistik), 82,85% (eighty-two-point eighty-five percent) companies in Indonesia experienced the derivation of revenue. Since this pandemic first occurred in Indonesia on around March 2020, many companies went bankrupt or applying for the Postponement of Debt Payment Obligation (PKPU) such as: (i) Global Mediacom; (ii) Trans Retail Indonesia; (iii) Ace Hardware, and etc. COVID-19 has also resulted in a large termination of employees in medium and large enterprises on a scale of 35,56% (thirty-five-point fifty-six percent). This situation caused legal problems and a dispute related to manpower, bankruptcy, insolvency, etc.
Government Regulation in Lieu of Law No. 1 of 2020 concerning State Financial Policy and Financial System Stability for Handling the COVID-19 Pandemic and/or in the Context of Facing Threats that Endanger the National Economy and/or Financial System Stability (“Perpu 1/2020”) which was set on 31 March 2020, has stated that the COVID-19 Pandemic has actually disrupted economic activity and had major implications for the economies of most countries around the world, including Indonesia. The implications of the Covid-19 pandemic have also had an impact on the threat to the financial system, as indicated by the derivation in various domestic economic activities due to the handling of the Covid-19 pandemic, which poses a risk to macroeconomic and financial system instability. Therefore, the Government of Indonesia issued Perpu 1/2020 in the context of handling the Covid-19 pandemic and/or facing threats that endanger the national economy and/or financial system stability.
- GENERAL PROVISIONS REGARDING FORCE MAJEURE IN INDONESIA
Force majeure generally is known as a situation beyond the reach of the parties which they did not expect, that cause an agreement to be unperformable or unable to be fulfilled on time. In relation to the definition of force majeure, Articles 1244 and 1245 of the Indonesian Civil Code (“ICC”) defines force majeure as an unforeseen situation that caused the debtor to be unable to perform its obligation as there is nothing that the debtor can do to rectify the situation. If such circumstances occur, the parties should not be held responsible for failure to fulfill their obligations under the contract. However, after the situation returns to normal, the parties are still obliged to fulfill their obligation.
According to experts, force majeure can be categorized as (i) absolute, where the agreement will be declared null and void, or; (ii) relative, where the agreement can continue and implemented but the fulfillment of its obligation postponed. Therefore, it is said to absolute, if the force majeure results in the destruction of the object of the agreement so that the agreement is automatically canceled. Whereas relative, if the force majeure condition results in obstruction or delay in the implementation of the obligations of the parties in the agreement, and does not result in termination of the agreement.
Judicial courts in Indonesia also acknowledge force majeure situations that could affect the party’s incapability to fulfill their obligations in the agreement. This can be seen in the Supreme Court Decision No. 285 PK/Pdt/2010 dated 27 September 2010 that stated the court must consider economic conditions when the parties fulfill their obligations. Thus, the existence of a force majeure must be proven that there is a relationship between the multidimensional crises that occur with the party's ability to carry out its obligations.
- IS COVID-19 CONSIDERED AS A FORCE MAJEURE?
The agreement made by the parties may very different from one to another. There could be differentiation from the object of the agreement, the parties, the terms, and conditions, etc. This condition cause COVID-19 could impact some parties to fulfill their obligation in several agreements but not in other agreements. Therefore, to determine whether COVID-19 can be considered as force majeure or not, cannot be generalized and must be examined case by case.
To determine that the force majeure occur, the parties must refer to their contract and verify is there any provision regarding force majeure clause in their contract. Is the contract specifically mention COVID-19 or pandemic as a force majeure condition? The force majeure clause usually does not refer to specific events. Therefore, the parties may need to rely on general contractual terms (the ICC) and evaluate whether the COVID-19 pandemic fulfills the elements of force majeure event as stipulated on the ICC or other related regulation. The implication of a force Majeure event can only result in the postponement or temporary cessation of the obligation arise from the agreement. There is no basis for the parties to reduce the quality of their obligation except agreed by both parties.
Usually, the party that was affected by force majeure sends a notification letter to the other party, stating that a force majeure condition has occurred, and caused an inability to fulfill its obligation. Some problems may arise if the counter-party of the agreement, does not agree with the notification letter, and consider that COVID-19 is not a force majeure condition. If this situation occurs, then this is the role of the judge to determine whether COVID-19 is considered as force majeure or not in the agreement.
This article is designated to provide only general information and is not intended to be a comprehensive advice; and the reader may not act on the basis of any information contained in this brochure without seeking professional advisor.