The impact of Covid-19 to existing contracts

On April 13 2020, a presidential decree which confirmed Covid-19 outspread non-natural disaster as a national disaster has been issued by Indonesia’s President Joko Widodo.

This decree was issued based on the right considerations that covid 19 has impacted the increasing number of casualties and property losses; widespread coverage affected areas; as well as the implications on socio-economic aspects that are widening in Indonesia; and that the World Health Organization (WHO) has declared COVID-19 as Global Pandemic on March 11, 2020.

This has led to some debate about the specific implications of the ongoing contracts, bearing in mind that the Presidential Decree is closely related to Force Majeure in an agreement. As we know, force majeure is usually included in an agreement, as stipulated in articles 1244 and 1245 BW (Burgerlijk Wetboek), with the term used in that article as overmacht (forceful condition).

Article 1244:
“An obligor shall be ordered to compensate for costs, losses and profit if he/she cannot prove that the non-performance of a legal obligation or the late performance of such legal obligation, is caused by something which is unforeseen, for which he/she cannot be held responsible, even in the absence of bad faith on his/her part.”

Article 1245:
“There is no compensation for costs, losses or profit, if because of uncontrollable circumstances or because of happenstance, the obligor is prevented from delivering or performing something which is obligatory, or commits an act which is prohibited for him/her.”

There are two general opinions about the impact of the presidential decree, firstly the presidential decree can cancel the contract, and secondly, the presidential decree serves as a stepping stone for the parties to adapt to the disaster affected situation.

The first opinion is based on the principle of legal certainty, where if in a clear and explicit contract there is a clause that the contract can be terminated due to force majeure, and supported by a clear definition of force majeure in the contract, in this case by stating that “government action” is included in force majeure, if the clause is fulfilled, the parties must expressly submit to article 1245 BW.

The second opinion is not much different from the first opinion, the difference is the end result. The second opinion tends to make this force majeure a stepping stone to determine whether the contract must be postponed, renegotiated, or canceled. This means that Presidential Decree 12/2020 needs to be acknowledged by the parties first as a reason for force majeure, without this recognition by the parties, it will open up opportunities for contract breach on contract due to force majeure. On the other hand if the parties agree that Presidential Decree 12/2020 as the basis of Force Majeure, the parties in good faith can determine how to adapt the contract so that it is adjusted with consideration of the fulfillment of each party’s obligation.

This opinion is based on the interpretation that in article 1245 BW, force majeure only relates to waive of the obligation to compensate, so it does not necessarily abolish the party’s obligations. Therefore, the parties are ideally aware to continue to fulfill their respective obligations, but adjusted to the current situation.

The attitude of the parties in the agreement towards force majeure should ideally be carried out with the aim of fulfilling each party’s obligations in the best way, taking into account the agreement itself, business-wise and field conditions.

Apart from the two opinion above, Presidential Decree 12/2020 cannot be ignored, moreover, the impact of covid-19 has a very wide influence on all lines from upstream to downstream, therefore all parties are obliged to prudently measures their legal consideration into account regarding the ongoing agreement.

Consult your agreement with consultants or professionals to get a more personal legal perspective according to your circumstances.

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