Covid-19 Pandemic and Force Majeure: According to the Perspective of Indonesian Contract Law

Monday, September 14 2020 | CONTRACT LAW

The current Covid-19 pandemic has driven governments worldwide to introduce protective measures and restrictions in order to contain and mitigate the rapid spread of the virus, including the Government of the Republic of Indonesia, who has continuously issued regulations relevant to the pandemic, among others are:

  • Regulation of the Government of Republic of Indonesia Number 21 of 2020 on Large-Scale Social Restriction for the Acceleration of Mitigation of Corona Virus Disease 2019 (Covid-19);
  • Presidential Decree Number 11 of 2020 on Decree of the President of the Republic of Indonesia Number 11 of 2020 on Stipulation of Public Health Emergency of Corona Virus Disease 2019 (Covid-19);
  • Presidential Decree Number 12 of 2020 on Stipulation of Non-Natural Disaster of the Spreading of Corona Virus Disease 2019 (Covid-19) as National Disaster (“Presidential Decree No. 12 of 2020”);
  • Regulation of the Minister Of Health of the Republic of Indonesia Number 9 of 2020 on Guidelines on Large-Scale Social Restriction for the Acceleration of Mitigation of Corona Virus Disease 2019 (Covid-19), which become the legal basis for the issuance of many regional regulation on Large-Scale Social Restriction;
  • Circular Letter of Ministry of Industry Number 4 of 2020 on Implementation of Factory Operations during the Corona Viruses Disease 2019 Community Health Emergency;
  • Regulation Minister of Trade of Republic of Indonesia Number 3 of 2020 concerning Amendment to the Regulation of the Minister of Trade No. 44 Concerning Provisions on the Import of Horticultural Products;
  • Regulation of the Minister of Trade No. 23 of 2020 concerning Temporary Prohibition for Exports of Antiseptic, Mask Raw Materials, Personal Protective Equipment, and Masks;
  • Regulation of Minister of Trade Number 10 of 2020 on Temporary Prohibition of Imports of Living Goods from the People's Republic of China;
  • Circular Letter of the Minister of Manpower Number: M/3/HK.04/III/2020 on Worker/Labor Protection and Business Continuity in the Context of Preventing and Countering Covid-19;
  • Regulation of Minister of Law and Human Rights of the Republic of Indonesia Number 11 of 2020 on Temporary Ban on Foreigners from Entering the Territory of the Republic of Indonesia;
  • Regulation of the Financial Services Authority of the Republic of Indonesia Number 11/POJK.03/2020 of 2020 on National Economic Stimulus as Countercyclical Policy to the Impact of the Outbreak of the Coronavirus Disease 2019;
  • Letter of the Financial Services Authority of the Republic of Indonesia Number S-9/D.05/2020 of 2020 on Countercyclical Policy to the Impact of the Outbreak of the Corona Virus Disease 2019 (Covid-19) for Financing Companies; and
  • Circular Letter of Financial Services Authority of the Republic of Indonesia Number S-88/D.04/2020 of 2020 on Handling and Controlling the Distribution of COVID-19 in the Capital Market Industry.

It is an indisputable fact that the implementation of numerous governmental policies and measures are causing significant disruption on commercial activities. The business doers may find that they or their counterparties are now struggling to meet their contractual obligations, which have becoming increasingly difficult and uncertain. Understandably, many contracting parties will be examining their contracts in search of relief. Due to these regulations, Indonesian business doers are forced to adapt to the rapidly changing governmental policies, recommendations, orders, and directives. Therefore, now more than ever is a crucial time for Indonesian local and foreign investors as well as their legal consultants to have comprehensive understanding on the implementation of force majeure in the perspective of Indonesian contract law.

Nowadays, almost all commercial and consumer contracts include a force majeure clause. It has long been considered as a “boilerplate” provision in a contract. Usually, such clause stipulates underlying circumstances that can be considered as force majeure events as well as procedures that must be followed in case of a force majeure event by affected party. The function of the clause is to excuse the affected party from performing a contractual obligation or prevents the other party from enforcing a contractual right.

Indonesian law is classified in the civil law group as found in Continental European countries such as Netherland and France, as opposed to the common law systems such as those in the United Kingdom and its former colonies. Indonesian contract law adheres to the tradition of civil law, which is based on regulations that are inherited from the colonial government of Dutch East Indies. Since independence from Dutch colonization, the government of the Republic of Indonesia has adopted the Old Dutch Civil Code (Oud Burgelijk Wetboek) as the Indonesian Civil Code (Kitab Undang-Undang Hukum Perdata) which was promulgated in 1848.  Indonesian Civil Code systematically consists of four (4) books. Until today, Book Three of the Indonesian Civil Code, which is consisted of Article 1233 to Article 1864, serves as the general rules and principles of contract laws in the Republic of Indonesia.

Article 1338 of Indonesian Civil Code contains a principle called pacta sunt servanda, which rules that all contracts made in accordance with the law shall apply as law for those who make it. They cannot be revoked otherwise than by mutual agreement, or pursuant to reasons, which are legally declared sufficient. Moreover, the article also states that such contract shall be executed in good faith. It is important to bear in mind that based on Indonesia contract law, the obligations of contracting parties are even wider than the ones explicitly written in the contract. Article 1339 of the Indonesian Civil Code states that a contract shall bind the parties not only to that which is expressly stipulated in the contract, but also to that which, pursuant to the nature of the agreements, shall be imposed by propriety, customs, or the law.

Performance of any contractual obligations by contracting parties is called “prestasi”, derived from Dutch word “prestatie”. Based on Article 1234 of Indonesian Civil Code, such performance can be expressed by giving something, doing something, or not doing something. Default of such contractual obligations or breach of contract are called “wanprestasi”, derived from Dutch word “wanprestatie”. Such default can raise the non-defaulting party to claim for indemnification for any and all damages suffered by him, termination of the contract, transfer of risk to the defaulting parties, and should there is any relevant legal proceedings, the defaulting party shall bear the court fee.[1]

Indonesian Civil Code does not expressly stipulate the definition of force majeure. Nevertheless, it does provide limitation as to what can be concluded as a force majeure event. The concept of force majeure can be found in many provisions in the Indonesian Civil Code. There are several articles that can be used as guidelines for force majeure in the Indonesian Civil Code, including Articles 1244, 1245, 1545, 1553, 1444, 1445 and 1460. Many legal theories, doctrine and jurisprudence in Indonesia also acknowledge force majeure or as a part of Indonesian contract law. Article 1244 of Indonesian Civil Code states that a contracting party shall be punished by reimbursing expenses, losses and interests if he cannot prove that the default was caused by something unforeseeable, which could not be imposed to him, if he is not in bad faith. Furthermore, Article 1245 of the Indonesian Civil Code expressly states that should a contracting party suffer from a force majeure (overmacht) there shall not be any indemnification of fees, losses and interests. In line with the previous articles, Article 1247 of Indonesian Civil Code stipulates that a contracting party shall only required to reimburse the expected costs, losses and interests  which can be predicted at the time the parties enter into agreement, unless such non-performance is due to the deception made by him. Based on the above provisions, the main elements that can form a force majeure event are:

  1. A reasonably unforeseeable event that occurs after the execution of the contract and must not be contemplated in the contract, otherwise the event can no longer be classified as a force majeure event;
  2. It has created obstacle(s) that impedes the fulfillment of contractual performance by the affected party;
  3. This inability to perform is not caused by the contracting party's mistake or negligence; and
  4. The affected party is acting in good faith.

Based on the circumstances, Indonesian law jurists classify force majeure into two (2) categories, which are absolute force majeure (absoluute overmacht) and relative force majeure (relatief overmacht).[2] Absolute force majeure occurs when an obligation really cannot be carried out entirely, for example, when the object of the contract is permanently destroyed by natural disasters. In this case, the fulfillment of performance is not possible to be done by anyone or by everyone. Meanwhile, a relative force majeure occurs when a contractual performance is still possible to be carried out but the affected party will incur a very high expense or a very large cost. For example, the price of imported raw materials becomes very high or the government suddenly prohibits bringing the object of the contract out of a port.[3]In general, the acknowledgment force majeure usually has the following effects:

  1. The affected party is excused from its obligations during the period of the force majeure event. Upon completion of the said force majeure event, the party must resume its obligations;
  2. The affected party is not liable to pay damages for non-performance of its obligation;
  3. In some cases, termination of contract.

Aside from the Indonesian Civil Code, provisions in regards to force majeure can also be found in various legislations in the Republic of Indonesia. In general, regulation of Force Majeure in legislations can be grouped into two (2) large groups. First, legislations that states force majeure as a clause that must be put in the contract with contents as regulated in the said legislation. This group includes, among others, Law Number 2 of 2017 on Construction Services; Presidential Decree  Number 80 of 2003 on Procurement of Goods and Services which have been amended many times respectively with Presidential Decree Number 61 of 2004, Presidential Regulation Number 32 of 2005, Presidential Regulation Number 70 of 2005, Presidential Regulation Number 8 of 2006, Presidential Regulation Number 79 of 2006, Presidential Regulation Number 85 of 2006, and lastly with Presidential Regulation Number 95 of 2007. In Law Number 2 of 2017 on Construction Services, operational definition of force majeure is not given. However, its Article 47 paragraph (1) states that a construction work contract shall at least include description of force majeure, which describe the conditions on events beyond the will and power of the parties that cause damage to any of the contracting parties of a construction work contract.

The second group consists of legislations that contain provisions regarding force majeure, but it does not require the inclusion of force majeure clause in the contract. Legislations that can be included in this group are, among others, Law Number 13 of 2003 on Manpower, Law Number 23 of 2007 on Railways, Law Number 4 of 2009 on Mining of Minerals and Coals, Law Number 22 of 2009 on Traffic and Transportation Services, Regulation of Bank of Indonesia Number 13/3/PBI/2013 on Transparency of Financial Condition of Rural Bank , Regulation of Bank of Indonesia Number 10/4/PBI/2008 on Report on the Implementation of Card-Based Payment Instrument Activities by Rural Banks and Non-Bank Institutions.[4] Article 164 paragraph (1) of Law Number 13 of 2003 on Manpower, for example, stipulates that an entrepreneur may terminate the employment of his workers/ laborers because the enterprise has to be closed down due to continual losses it suffers for two (2) years consecutively or due to force majeure. Based on this provision, even if a work contract does not contain a force majeure clause, a force majeure can still be used as reason for termination of a work contract.

From the above analysis, it become apparent that based on Indonesian Law, the absence of a force majeure clause in a contract shall not hinder an affected party to use force majeure as an excuse for exoneration of non-performance or termination of a contract. Albeit there is no provision regarding force majeure in a contract, the Indonesian Civil Code as the general provisions of contract in Indonesia has clearly acknowledge the possible occurrence of force majeure as seen in its Articles 1244, 1245, 1545, 1553, 1444, 1445 and 1460. Moreover, as previously mentioned, some legislations in Indonesia have explicitly contained provisions regarding force majeure, without requiring the inclusion of any force majeure clause in the contract. In drawing this conclusion, it is prudent to also refer to Article 1339 of Indonesian Civil Code, which states that a contract shall bind the parties not only to that which is expressly stipulated in the contract, but also to that which, pursuant to the nature of the agreements, shall be imposed by propriety, customs, or the law.

Some contracts contain force majeure clauses that list out in detail the events, which would constitute a force majeure event. Such lists may be either exclusive or non-exclusive. An exclusive list exclude any events that is not listed in the list as a force majeure event. Meanwhile, non-exclusive lists (which tend to be most common) allow for the possibility of other, non-listed events qualifying as force majeure. Furthermore, some contracts also stipulates that a force majeure event can only be constituted should there has been a formal statement from the government declaring such event as a force majeure.

As previously mentioned, the Government of The Republic of Indonesia has clearly taken measures by issuing regulations that declare the current Covid-19 outbreak as a “Public Health Emergency” and “National Disaster”. However, until the day this article is written, there has not been any formal statement made by the Government of The Republic of Indonesia to declare the pandemic as a force majeure event that releases contracting parties from their contractual obligations. Furthermore, the Coordinating Minister for Politics, Law and Security of the Republic of Indonesia, Moh. Mahfud MD, has issued firm statement that Presidential Decree No. 12 of 2020 is not intended to, and indeed cannot, be used as an underlying regulation to declare the Covid-19 pandemic as a basis for contract termination.[5]  To date, there is only one regulation in Indonesia that has declared the Covid-19 outbreak as a force majeure event, which is the Decree of the Director General of Tax Number KEP-156/PJ/2020 of 2020 on Tax Policy regarding the Spread of Corona Virus Epidemic 2019. However, the said regulation only declare the Covid-19 outbreak as a force majeure event that justify the removal of administrative sanctions for individuals taxpayers in late reporting of the 2019 Annual Tax Return. Thus, such regulation cannot be deemed as an official declaration of Covid-19 pandemic as a force majeure event, which lets off the affected party for non-taxations obligations. 

Unless the contract has explicitly classify an “epidemic”, “public health disaster”, “national disaster”, or any other similar words as one of the force majeure events that excuses the non-performance and/or termination of a contract, it is matter of legal interpretation to determine whether the outbreak can be classified as a force majeure. A contracting party cannot freely and unilaterally classify all kinds of extraordinary, unforeseeable, and unavoidable events as a force majeure event in order to excuse an exoneration of non-performance or termination of a contract. It is unquestionable that the current outbreak of Covid-19 is an extraordinary, unforeseeable, and unavoidable event that has definitely bring many severe impacts on almost all nations around the globe, including Indonesia. According to the Institute for Economics and Finance (INDEF), the Covid-19 outbreak will lead the Republic of Indonesia to a loss up to IDR 127 trillion.[6] It is very crucial to note that there is no generic definition of force majeure in Indonesia Law. Thus, despite public discourse that qualify Covid-19 as a force majeure, it is not sufficient to prove that the outbreak necessarily can be used as a valid excuse to exonerate a non-performance or terminate a contract. In each case, it is depend on the parties to follow their contractual clauses on force majeure, or in case there is none, their interpretation of the applicable laws.

Further legal and factual analysis needs to be made on a case-per-case basis to determine whether the degree of impediment caused by the outbreak is sufficient to exonerate a party from its non-performance or to terminate a contract based on force majeure. It is necessary to prove a direct causal relationship between the outbreak along with the relevant government's policies and regulations in which results in the inability to carry out the contractual obligations. Therefore, further studies of the terms and conditions of the contracts and transaction/business mechanism between the parties, as well as comprehensive analysis of the applicable laws are necessary. For example, should there is other reason unrelated to the Covid-19 outbreak that has caused the non-performance, it is unlikely that a Covid-19 related force majeure argument would be successful.

If a party declares force majeure but is actually not contractually entitled to do so, it may expose itself to a claim for repudiatory breach of contract and the other party may be entitled to claim damages as a consequence. Should there is a dispute between the contracting parties on whether the current Covid-19 pandemic has the nature of  force majeure, the final decision shall fall within the exclusive competence of the court or arbitration, as accordance with the dispute resolution clause of the contract or the mutual agreement of the parties. When resolving such disputes, the court will assess a number of circumstances, taking into account the specifics of a particular contract, including without limitation:

  1. The nature, terms and conditions of the said contract, especially the force majeure clauses (if any); 
  2. Whether the main elements of force majeure pursuant to the provisions of Indonesian Civil Code and other relevant and applicable legislations have been met;
  3. Whether the affected party has any contribution towards the impediment of the performance. This depend on (1) the ability of such party to  prevent, hinder or delay that event (2) whether its non-performance was due to circumstances outside of its control; (3) there were no reasonable steps that it could have taken to avoid or mitigate against the event;
  4. Whether there is a direct causal relationship between the Covid-19 outbreak and the inability to perform, as well as the degree of impediment caused by the outbreak; and
  5. The court may also apply the doctrine of good faith under Article 1338 of Indonesian Civil Code to exonerate a party or reduce their liability because the performance of the obligation was too difficult, though not necessarily impossible.

As opposed to courts in common law countries, the courts in the Republic of Indonesia are not bound by previous court decisions. So it remains to be seen how courts will decide on the effect of the Covid-19 outbreak on certain contractual obligation and whether it will be sufficient to excuse the exoneration of a non-performance or termination of a contract.

Some preventive measures can be taken by a contracting party in order to hinder from any repudiatory breach that raise claim of damages or disputes. The most sensible measure is by contacting counterparties of contracts which may be affected and discuss a possible renegotiation or postponement of obligations. At the same time, it is important to be vigilant since it is also possible that counterparties with lack of good faith will try to use the Covid-19 outbreak as a pretext for termination of an unfavorable contract on the purported grounds of force majeure. Upon receive of such notice, appropriate legal and factual analysis is essential to determine whether it shall reject the pretext effectively in order to protect its contractual rights.

Further appropriate measures are, among others:

  1. Reviewing the wording of force majeureclauses in contracts, paying particular attention to the list of events. Should the party is seeking to rely on the force majeure clause, it is better to include specific wording such as “pandemic”, “epidemic”, “outbreak”, ”public health emergency”, “national disaster,” or “government regulations”; and
  2. Adding or reviewing notification provisions of any force majeure. Specifically, on whether a notice is required, when it is required, what information and evidence it must contain and where it should be sent to and by what means.

Meanwhile, in drafting new contracts, wording in force majeure clause such as “unforeseeable” shall be avoided should the parties wish to rely on the force majeure clauses for impediments caused by the Covid-19 pandemic.

This article is made in May 2020, under the request of Journal of Swiss Chinese Law Review (ISSN-2673-3870), a journal that aims to promote professional and academic collaboration (link: https://cnsla.org/).

[1] Subekti, Hukum Perjanjian, Intermasa, Jakarta, 2002. pg. 45

[2] Subekti, Pokok-pokok Hukum Perdata, Intermasa, Jakarta, 2002, pg. 150

[3] Mariam Darus Badrulzaman, KUH Perdata Buku III: Hukum Perikatan dengan Penjelasan, Alumni, Bandung, 1996, pg. 37

[4] Rahmat S.S. Soemadipradja, Penjelasan Hukum tentang Keadaan Memaksa, Nasional Legal Reform Program, Jakarta, 2010, pg. 7

[5] Mahfud MD, Coordinating Minister for Politics, Law and Security of the Republic of Indonesia, in his Keeynote Speech at Webinar on “Development, Problems, and Implications of Force Majeure as a Result of Covid-19 for the Business World” held by Civil Law Lecturers Association (APHK) on 22 April 2019.

[6] “The Covid-19 Impacts on Investment in Indonesia”  accessible on https://www.investindonesia.go.id/en/article-investment/detail/the-Covid-19-impacts-on-investment-in-indonesia dated 9 March 2020

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