Fahrul S. Yusuf participates in the IR Virtual Series – International Contracts: How has the global pandemic impacted international contracts?

Fahrul S. YusufPartner, SSEK Legal Consultants

Foreward by Andrew Chilvers

The COVID-19 pandemic is one of those once-ina-lifetime events that few people predict but which affects everyone – individuals, businesses and governments.

During the past four months the pandemic has caused huge disruption to companies across the globe as many have suddenly found it impossible to fulfil their contractual obligations. From retail and the construction industry to hospitality and manufacturing, every area of the world economy has suffered.

As a consequence, lawyers and their clients are now rushing to look more closely at the force majeure doctrine as an option for businesses that are no longer able to perform their contractual obligations.

Different legal systems have different legislative definitions for force majeure. For instance, English common law – unlike in civil law – has no universal definition. The ability of a contracted party to invoke force majeure will depend on the presence of a force majeure clause and the particular terms set out in the contract.

Can force majeure justify a suspension of performance or the unilateral imposition of new deadlines or cancellations of purchase orders?

In Indonesia we are based on civil law and force majeure is provided for in our civil code, which regulates contracts in Indonesia. Consequently, contracts provide for force majeure and include certain items, incidents and events that can come before the courts. That’s the theory, but in practice what happens in court can be a different story. As you all know, litigators can be very creative, they can force judges to deny the force majeure claim or even accept the force majeure claim, so it depends on the litigator. In principle, whenever there is a force majeure clause, it’s usually acceptable as long as it is clearly specified in the contract. It will have to specify the kind of force majeure event and how both parties could claim it is indeed force majeure.

As a result, the parties will have to prove there is the possibility of a sudden and unexpected event that has made the performance of the contract impossible. It’s worth noting that it’s not always successful for a company to claim force majeure in the courts. But in most of the successful cases, the agreements are very clear as to what constitutes force majeure or not and what procedures should be followed by a party, to be able to successfully claim that force majeure has happened.

In the case of COVID-19, there has not been a case yet but if we learn from what’s happened in previous cases before the pandemic, I’m sure that COVID-19 is not a guarantee that the court will honour the force majeure claim. To date there have not been many cases submitted to the court and it’s still a developing situation.

Does the COVID-19 crisis and possible breach of international contracts fundamentally alter assumptions surrounding risk allocation, supply chains and access to markets?

Our civil code actually requires that the party must observe what’s happening in reality before they can conclude in any dispute resolution. With COVID-19, I suspect that the court should honour what’s really happening in practice because the pandemic has caused the non-performance of all parties. But, again, it’s not been tested yet.

My expectation is that the courts will honour any party that claims they could not perform because of COVID-19. It’s happening everywhere and not just in the retail industry, but in manufacturing and also in e-commerce. It’s almost across the board here in Indonesia.

It’s something that is not normal, not expected, and it’s impossible to perform the objectives of the contract because of that particular situation. I don’t know what will be happening after the pandemic. Just like my answer to the first question, it’s still a wait-and-see period. We lawyers are still waiting for major cases where the judges would actually honour the force majeure by the non-performing parties. Risk allocation is so difficult to define in such circumstances.

Where a contract does not contain a force majeure clause, how simple is it for parties to consider the doctrine of frustration? In which jurisdictions would this apply?

Our laws do not recognise the doctrine of frustration but since we recognise the freedom of principle doctrine, we can have that specified in the contract to the same effect. If that particular doctrine is clearly specified in the contract, we could have the same effect and we also allow parties to govern their contracts using other laws, assuming that there is a sufficient nexus between the parties and the foreign laws.

We could include the doctrine in the contract as long as the dispute resolution is using arbitration, not a court judgment, because Indonesia does not recognise foreign court judgments. If the contract is based on foreign law, maybe a country with a common law and then using the doctrine of frustration, and if it is disputed and is using arbitration in that country, an award of arbitration is going to be recognised in Indonesia as long as the country is a member of the New York Convention, 1960.