Indonesia: Legal Overview On The Implementation Of Force Majeure Clause Under Indonesian Law In The Light Of COVID-19

I. Background

The World Health Organization (WHO) has declared the Coronavirus Disease 2019 ("COVID-19") as a pandemic on 11 March 2020. Following up such, the Indonesia government has also stated the COVID-19 as a non-natural national disaster on 13 April 2020.

In response to the situation, since 10 April 2020 Indonesian government has introduced the implementation of Large-Scale Social Restriction/Pembatasan Sosial Berskala Besar ("PSBB") and subsequently imposed the Micro-Scale Community Activity Restriction/Perlakuan Pembatasan Kegiatan Masyarakat Berbasis Mikro ("PPKM"), specifically in DKI Jakarta area and some provinces in Indonesia. The PSBB and PPKM urge all businesses and organizations to limit their operational exempting for some specific business sectors. This is undeniable would cause some contracts and transactions to be postponed or canceled. Thus, it is important for all business actors to understand the potential risks to their business and the mitigation of such risks. The PSBB and/or PPKM are implemented for certain period of time, with options to be extended depending on the Covid-19 situation at such given time. This gives much uncertainties for business in completing and/or performing their contractual obligations.

II. Legal Frameworks

In providing this legal overview, we refer to the following prevailing laws and regulations:

1. Kitab Undang-Undang Hukum Perdata/Indonesia Civil Code ("ICC");
2. Law No. 24 of 2007 on Disaster Mitigation;
3. Government Regulation in Lieu of Law No. 1 Year 2020 on State Financial Policy and Stability of Financial Systems for the Management of Coronavirus Disease 2019 and/or in the Framework of Encountering the Threat to National Economy and/or Stability of Financial Systems ("GR in Lieu of Law 1/2020");
4. Government Regulation No. 21 of 2020 on Large-Scale Social Restrictions for the Acceleration of Coronavirus Disease 2019 Mitigation ("GR 21/2020");
5. Minister of Health Regulation No. 9 of 2020 on the Guidelines on Large-Scale Social Restriction for The Acceleration of Mitigation of Corona Virus Disease 2019 (COVID-19) ("MoH Regulation 9/2020");
6. Presidential Decree No. 9 of 2020 on the Amendment of Presidential Decree No. 7 of 2020 on the Task Force for the Acceleration of Coronavirus Disease 2019 Mitigation ("PD 9/2020");
7. Presidential Decree No. 11 of 2020 on the Stipulation of Public Health Emergency Status due to Coronavirus Disease 2019 ("PR 11/2020");
8. Presidential Decree No. 12 of 2020 on the Stipulation of Non-natural Disaster of Coronavirus Disease 2019 (COVID-19) Outbreak as National Disaster ("PD 12/2020"); and
9. Head of National Agency for Disaster Management/Badan Nasional Penanggulangan Bencana ("BNPB") Decree No. 13.A of 2020 on the Extension of Certain Circumstances Status of Disaster Emergency due to the Outbreak of Corona Virus in Indonesia ("Head of BNPB Decree 13A/2020"); and
10. Governor of DKI Jakarta Decree No. 796 of 2021 on the Extension of Micro-Scale Public Activity Restriction ("Governor DKI Jakarta Decree 796/2021").

III. Legal Analysis

1. Overview on Force Majeure under Indonesian Law

Definition of Force Majeure: We note that the concept of force majeure is acknowledged in Indonesian law as a defense against failure of obligation/liabilities performance. The concept of force majeure is generally regulated under Articles 1244 and 1245 ICC which officially stated as follows:

Article 1244 of ICC: "An Obligor shall be required to provide compensation for costs, losses, and interest if Obligor cannot prove that the non-performance or the late performance of Obligor's obligation is the result of an unforeseen event for which Obligor was not responsible, provided Obligor was not acting in bad faith."

Article 1245 of ICC: "No compensation for costs, losses, and interest shall be payable if Obligor, because of an act of God or an accident, was prevented from delivering or performing an obligation that Obligor was obliged to deliver or perform, or Obligor was compelled to do something that it was prohibited from doing."

In this context, we also refer to the Black's Law Dictionary which defines force majeure as an event or effect that can be neither anticipated nor controlled. In alignment with such definition, the legal doctrine from J. Satrio defines force majeure event as any circumstances which avert or delay the performance by the affected party whereby such event is not happening due to the fault of contracting parties. Nonetheless, it is important to note that for a force majeure defense to be accepted, the affected party shall maintain its good faith and prove that the event could not reasonably have been foreseen at the time of contracting. It is also important to note that the Indonesian Law does not provide any specific definition of the force majeure.¹

Elements of Force Majeure: We note that main elements that shall be fulfilled in the occurrence of force majeure event are the following:

The failure to meet the above requirements may cause the non-performance of defaulting party to be attributed to such party and thus, it will be liable for the damages.

Consequence of Force Majeure: In general, a force majeure event can relieve a defaulted party of their indemnification obligations while the relevant counterparty is not entitled to request for a cancellation of the contract.

We refer to Indonesia's legal doctrine, force majeure events can be classified into absolute force majeure and relative/temporary force majeure which may result in two different consequences.² If a force majeure is considered absolute in nature, it will consequently result in termination of such contract. Otherwise, if the force majeure event considered to be temporary in nature, it is only possible to postpone the completion of the obligations of the contract until the relevant force-majeure event has been resolved.

Force majeure clause in a contract: In a contract, the force majeure clauses will alter parties' obligations or liabilities under the contract in the occurrence of a force majeure events. Contracting parties are allowed to set up and define their own rules on the perimeter for such force majeure event when drafting their contract as conceded in the "freedom of contract" principle which stipulated under Article 1338 ICC.

We note that the force majeure clause in a contract shall include at least the following:

a. A clear description of what event that would be considered as force majeure;

b. The consequences of the force majeure, whether postponement or cancellation

c. The settlement procedures in the event of force majeure.

Nevertheless, the Article 1244 and 1245 ICC will generally apply shall the contracting parties did not designate any force majeure provisions. Furthermore, the Indonesian civil courts are authorized by the law to conclude whether force majeure has happened and the defaulting party cannot be attributed thereto.

2. Overview on COVID-19 under Force Majeure Provisions in Indonesia

The COVID-19 condition in Indonesia: The first confirmed COVID-19 case on 2 March 2020 has led to an alarming situation in Indonesia. The Indonesian government has implemented various measures to seize the spreading of coronavirus, inter alia, restraining foreign travel, imposing social restriction, and implementation of physical distancing in the public areas. The government also has urged the citizens to work, study, and conduct religious practices at home during the emergency period.

Following up on the circumstance, BNPB has established a National Task Force through the PR 9/2020 to arrange collaboration between varied ministries and agencies from the central to sub-national level of government and the national police and army to prevent further spreading of the coronavirus. Further, the Head of BNPB had declared the disaster emergency period from 29 February to 29 May 2020 through the Head of BNPB Decree 13A/2020.

As the number of coronavirus infection is continuously rising, on 31 March 2020, the President of Republic Indonesia has declared that Indonesia is currently under a public health emergency situation through the PD 11 of 2020. Subsequently, the GR in Lieu of Law 1/2020 was enacted and introduces the PSBB which further regulated by the Ministry of Health through the MoH Regulation 9/2020.

Furthermore, the Indonesian government issued the GR in Lieu of Law 1/2020 considering that the COVID-19 pandemic has had impacted the national economic growth and the financial system, thus it is necessary for the relevant banking and financial authorities to establish state financial policies, including the taxation and financial relief for the mitigation of further economic impact of the pandemic.

Recently, the escalating cases of COVID-19 infection which has undoubtedly collide broad implications toward social and economic aspects in Indonesia. Together with local governments, the Indonesian government juggles tackling the pandemic whilst maintaining economic stability. This is done by, among others, agreeing workplaces and various public places to continue their operations by complying with capacity restrictions and strict health protocols, providing various tax incentives to individuals and corporations affected by the pandemic, and accelerating the vaccination program.

Implementation of force majeure provisions in light to COVID-19 in Indonesia: The implementation of PSBB and/or PPKM which urges business to temporarily halt or reduce the capacity of its operational activities. Such policy has caused the business actors to face difficulties as they are striving to satisfy their contractual obligations. The ultimate question is whether the party who fails to fulfill such contractual obligations can be protected from its liability in the name of force majeure?

Firstly, we have to determine whether the COVID-19 is considered as a force majeure. Based on the foreshadow explanation, it is clear that the WHO has officially announced COVID-19 as global pandemic. Subsequently, the President of Republic Indonesia has declared the pandemic as national disaster. The Indonesia prevailing law defines disaster as an event of which threaten and disrupt life and livelihood of society caused both by natural factors and/or non-natural factors which resulting in casualties, damage to the environment, property losses, and psychological impacts (Art. 1 (1) of Law 24/2007). Further, we note that an epidemic and disease outbreak can be categorized as a non-natural disaster (Art. 1 (3) of Law 24/2007).

With regard to the above explanation, it is clear that COVID-19 is considered as a non-natural disaster with the health emergency status considering its potential for a maximum level of threat, which has been followed by the promulgation of governmental orders instructing, among others, the temporary halt of certain operational business activities.

Secondly, the contracting parties should examine the force majeure clause in their contract. Force majeure clauses in a contract usually include a list of sample force majeure events. Provided that the contract is clearly stipulated that force majeure events include "epidemic", "pandemic", "disease outbreak", it is clear that such force majeure clause would be applicable in current COVID-19.

However, if the force majeure clause is drafted in a general manner and does not specify the above terms (e.g., beyond the parties' reasonable control), to determine whether an event is a force majeure, the parties may refer to the objective inquiry as outlined in the contract or the ICC. In general, an event that is not specifically listed as a sample of force majeure event under the contract may be invoked as a force majeure defense by the affected party as long as it fulfills the general requirements of a force majeure (either contractually or statutorily). Thus, this will be a specific issue which must be assessed on a case-by-case basis.

Thirdly, in the absence of a contractual force majeure clause, the provisions of Article 1244 and 1245 ICC will prevail. We can conclude that three main elements that should be satisfied for an event to be qualified as a force majeure, which are: (a) the circumstances should be unforeseen and outside the control of the parties; (b) the circumstances is not due the fault or negligence of the defaulting party; (c) the defaulting party should perform in a good faith by showing its best effort to avoid the non-performance and provide sufficient mitigation of the damage caused by its non-performance. Further, the defaulting party must be able to prove that the inability to perform the obligation was directly caused by the COVID-19 pandemic.

If the circumstances invoked has appropriately fulfilled the requirements of a force majeure as stipulated by the ICC, the defaulting party may claim to be partly or fully discharged from its contractual obligations. The parties may also agree in further extension of time, postponement of agreement, or termination in the event of continued non-performance.

Lastly, the party who seeks to invoke force majeure defense should check the required formalities to appeal to such defense in their contract. For example, providing a proper notice to the counterparty in writing as soon as reasonably practicable, or exercising any reasonable efforts to mitigate the damage and minimize the risks. Failure to preserve such formalities may be resulted in the inability of the defaulting party to confide in the force majeure defence.

IV. Conclusion

1. Indonesia Civil Law acknowledges the concept of force majeure in Articles 1244 and 1245 of ICC as the defence to failure of contractual performance. The force majeure can excuse a party from its contractual obligation should there be any unforeseen circumstances occurring beyond its control that prevents the performance of such contractual obligation. In this instance, such non-performance cannot be attributed to the party and thus it will not be liable for the damages caused.

2. The contracting parties are authorized to define and agree upon the scope of force majeure event, as well as its borderline, consequences, and the formalities to invoking such defence in their contract. Nonetheless, the Article 1244 and 1245 of ICC will remain prevail should the contracting parties do not expressly cover the force majeure clause.

3. The COVID-19 outbreak has been officially announced as a global pandemic by the WHO. Subsequently, The President of Republic of Indonesia has also declared the COVID-19 as a national disaster followed up by the issuance of numerous government acts to mitigate damage caused by the spreading of COVID-19, including but not limited to the travel restriction and halt on business operational activities. Thus, subjected to the wording of the contract concerned, the affected parties may potentially invoke the force majeure defense under the coronavirus outbreak.

Footnotes

1. J. Satrio, Wanprestasi Menurut KUH Perdata, Doktrin & Yurisprudensi (Bandung: Citra Aditya Bakti, 2014), page 102-105.

2. Subekti. Pokok-Pokok Hukum Perdata, (Jakarta: Intermasa, 2008) page 150.

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