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Covid-19: Application Of Force Majeure And Hardship Under The Civil Code

After almost two years from the very first outbreak of COVID-19 on a global scale, many efforts have been made by countries to restore the status quote of the economy, or to achieve the “new normal”. Yet, it does not mean that the execution and performance of transactions and contracts during this period remains completely intact. One of the external stimuli attributed to this situation is that the contractual obligations of parties could not be guaranteed due to the challenges caused by COVID-19.

What is Force Majeure?

According to the Civil Code 2015, force majeure means “an event which occurs in an objective manner which is not able to be foreseen and remedied after all possible necessary and admissible measures being taken.”

By this definition, for an event to be considered as force majeure, the following criteria must be satisfied:

First, such an event must occur objectively, without any interference or action of the parties to the contract, and its occurrence must have been beyond the reasonable prediction of the parties when they signed the contract. In other words, an unexpected event that affects the performance of the contractual obligation of either party, caused by the intention or fault of the parties, is not considered an event of force majeure.

Second, the consequences of the event could not be remedied even though the affected party has taken all reasonable measures. The remedies taken by the affected party could also mean measures to minimize the impact or damage caused by the event of force majeure. This precondition shall hold the affected party in a proactive position to take corrective actions. In most cases, with the occurrence of an event of force majeure, the affected party shall be exempted from the performance of its obligations. It is necessary that this requirement is met to prevent the abuse of this regulation, and to minimize the loss and damage suffered by the aggrieved party.

Third, the occurrence of the force majeure event must be the direct and sole cause of the failure of the contractual performance. As a matter of fact, this is not a precondition to an event of force majeure. However, it is the legal ground for the affected party to refer to the force majeure event as the basis for exemption of its contractual liability. Simply put, even though an event has the nature of force majeure, it may not be considered as the basis for exemption of contractual responsibility if it is not the direct cause  of a party’s failure to perform its contractual obligations.

What are the consequences of force majeure?

As mentioned above, in the event of force majeure, the affected party is exempt from its contractual liability. More specifically, such an exemption allows the affected party to delay, or does not perform the obligation without being held responsible for damages, penalty, or interest for late payment. Besides serving as the exemption from liability for the affected party, the preconditions to application of force majeure also protect the legitimate interests of the the aggrieved party and impose on the affected party the the commitment to minimize the damage to the aggrieved party.

What is hardship?

The Civil Code 2015 refers to the phrase “performance of contracts when circumstances change substantially” to define hardship. Accordingly, circumstances are deemed to change substantially when the following conditions are satisfied:

  • There is a change to the circumstances due to objective reasons, occurring after the contract is entered into;
  • At the time of entering the contract, the parties are unable to foresee the change of circumstances;
  • There is a change in circumstances to such an extent that the contract would not have been entered into or would have been entered into with completely different terms if the parties had foreseen such change;
  • The continuation of performance of the contract without changing the terms of the contract would cause serious loss and damage to one party;
  • The party whose benefits are affected has taken all necessary measures to the best of its ability and appropriate with the nature of the contract and yet is unable to prevent or mitigate the negative impact.

From the above provisions, we could draw out some similarities between an event of force majeure and hardship. Particularly, the occurrence of these events is due to objective reasons, unforeseeable to the parties, and the affected party has taken all possible measures to minimize the impact and remedy the consequences.

However, hardship has some material differences compared to force majeure:

  • In hardship, the affected party is still able to perform its obligations, but such performance would cause damage, instead of benefiting the party as originally intended. Meanwhile, in a force majeure event, the affected party is deemed to be unable to perform the obligation even though all necessary measures have been taken.
  • An event of hardship shall lead to the termination or re-negotiation of the contract. Whereas in a force majeure event, the affected party cannot refer to hardship as an excuse for its failure to perform its obligations, and is not exempted from its liability.

The application of Force Majeure and Hardship in the midst of COVID-19.

As is known, during the COVID-19 pandemic, contracts and transactions related to leasing premises and offices were significantly affected by the State’s social distancing orders. From what has been discussed, we find that it is difficult for the lessee to refer to the force majeure event as the basis for claiming its exemption from liability of paying rent. Although there are reasons to believe that the lessee’s revenue and income are significantly affected, it is hardly possible to prove that the lessee is incapable of performing its obligations despite taking all necessary measures. Therefore, in lease contracts, hardship is basically a possible mechanism to protect the lessor’s interests in the context of the COVID-19 pandemic.

Date of article: 22 September 2021.

This article is based on the current laws at the above recorded time and may no longer be relevant at the time readers access this article due to changes in applicable law and specific cases which the readers want to apply. Therefore, this article is for reference only.