CLIENT UPDATE
03 Jun 2020 The Uncharted Waters of COVID-19 Outbreak - Force Majeure and Construction Service Works in Indonesia
What you need to know
- The President has issued a decree declaring Covid-19 as a non-natural national disaster which may trigger Force Majeure claims in various areas of contractual relationships, including among others, in construction service works contracts.
- The Minister of Public Works and Housing issued an Instruction to mitigate Covid-19 risks in relation to construction service works.
- Force Majeure in a construction business may be established both from the Covid-19 situation and the Minister of Public Works and Housing Instruction.
- Most construction works in Indonesia will be likely to continue despite the delays until a clear and proven imminent threat of Covid-19 emerges to the construction site.
- Prevailing laws on the payment of wages must still be complied with by employers of construction workers.
What you need to do
- Keep updated on governmental institution regulations or decrees regarding the Covid-19 situation.
- Reassess and review the clauses within your contracts, especially ones related to the hinderance of performance (such as Force Majeure).
- Maintain communication with other construction business partners.
- Impose strict health requirements and procedures at the construction site.
- Cooperate with the responsible / relevant apparatuses under the Ministry of Public Works and Housing to affirm the existence of Force Majeure.
The outbreak of Corona Virus Disease 2019 ("Covid-19") sets an unprecedented situation in Indonesia where numerous businesses, including infrastructure and construction services, are forced to put works on hold due to the fear of Covid-19 contagion. Recently on 13 April 2020, President Jokowi issued Presidential Decree No. 12 on 2020 on the Determination of the Non-Nature Disaster of Corona Virus Disease 2019 (Covid-19) as a National Disaster ("PD 12/2020") which essentially declares the spread of Covid-19 as a non-natural national disaster.
While the situation may lead to an economic setback, since the opening of March 2020 (when the Covid-19 case was first reported in Indonesia), various governmental institutions has been racing to issue legal instruments to tackle the spread of Covid-19 within the scope of their Department's responsibilities. These various issued legal instruments are meant to mitigate any adverse impacts to business and industry and ongoing contracts between business parties as a result of Covid-19.
This Client Alert focuses mainly on the construction sector, in respect of which one of the more robust directions on the prevention of Covid-19 came from the Minister of Public Works and Housing ("MPWH") Instruction No. 02/IN/M/2020 on Protocol on Prevention of the Spread of Corona Virus Disease 2019 (Covid-19) in Construction Service Works ("MPWH Instruction"). To facilitate better understanding of the countermeasures, this Client Alert also examines whether Force Majeure maybe relevant for construction businesses in Indonesia in view of the Covid-19 situation.
Occurrence of a Force Majeure Event
Force Majeure in general
Pursuant to Article 1245 of the Indonesia Civil Code, under a condition of Force Majeure, a debtor (or a person/company having any obligation under a contract) would be released of any claims, damages and interest if such person / company does not perform its obligation under a contract. Article 1244 of the Indonesian Civil Code stipulates that the debtor must provide evidence that the conditions causing such non-performance should be stipulated as a Force Majeure condition. Given the broad scope of Force Majeure in Indonesia, in Indonesian Contracts Force Majeure conditions need to be considered in the light of the following:
- Specific conditions are from time to time categorized as Force Majeure under relevant laws and regulations. Examples of this include declarations by the General Directorate of Tax in Decree No. KEP-596/PJ/2019 which declared the riots in Papua and West Papua as a force majeure to loosen tax obligations around the region. In addition, the Ministry of Transportation Circular Letter No. 15 of 2019 also specified Force Majeure events such as forest fires for aviation industry.
- Specific conditions to be categorized as Force Majeure may be stipulated under the Force Majeure clause within the concerned contract / agreement between the parties. If the prerequisites under the Force Majeure clause are met and the situation can be classified as a Force Majeure situation, the debtor (or a person/company having any obligation under a contract) must provide a letter to its creditor(s) indicating the performance of the contract may be delayed/cancelled because the Force Majeure clause is met and the situation can be considered as a Force Majeure.
- In the event that the parties have not agreed on certain conditions to be categorized as Force Majeure, the existence of Force Majeure has to be decided by judges in a civil court proceeding. We provide below examples of cases related to Force Majeure conditions. Please note that Indonesia does not recognize the rule of binding precedent, thus the weight given by future courts to the decisions in each case may vary.
a. Case No. 285PK/Pdt/2010: Three palm oil plantation companies submitted a lawsuit to a bank in order to release themselves from any claims due to their non-performance. Under the Civil Review decision, the panel of judges stipulated that the bank could not claim for any damages or interest due to the non-performance of the companies. The panel of judges emphasized that, although not specifically agreed under any written agreement, the global economic crisis happening at the time of the case should be understood as a Force Majeure situation and the court subsequently released the companies from their obligations.
b. Case No. 409K/Sip/1983: The Plaintiff entered into an agreement with the Defendant to transport goods, in which the Plaintiff handed over the goods to the Defendant to be transported and delivered by the Defendant to the Plaintiff at the Plaintiff's address on an agreed date. The Plaintiff demanded compensation because the Defendant failed to fulfil its obligation. The Defendant claimed that the ship delivering the goods sank. Although not specified as a Force Majeure event in the contract between the Defendant and the Plaintiff, the Defendant argued that the sinking of the ship was a Force Majeure. The Supreme Court decided that the Defendant's inability to hand over the goods to the Plaintiff happened because of Force Majeure siutation.
c. Case 1787K/PDT/2005: The parties entered into a Build-Operate-Transfer (BOT) contract in 1996 for the Defendant to construct a gas tower building. However, in 1997 the economic crisis which occurred in Indonesia caused the Defendant to suffer significant difficulties in performing its obligations. This prompted the Plaintiff to file a lawsuit for the Defendant's breach of contract. Eventually, the District Court took the view that the circumstances surrounding the Defendant's failure to perform constituted a force majeure event as it resulted in a monetary crisis which hampered construction works, including the gas tower building. The Supreme Court affirmed the ruling of the District Court.
Based on the above cases, it should be noted that even if relevant contracts do not provide specific conditions stipulating the events which occur as Force Majeure events and the parties have differences on agreeing the occurrence of Force Majeure, the court will exercise its discretion to determine the occurrence of Force Majeure in Indonesia.
Does the Covid-19 Outbreak Constitutes as Force Majeure Event
In Indonesia, the Covid-19 outbreak may only be deemed as a Force Majeure event if (i) a law or regulation stipulates it to be a Force Majeure event, (ii) it is stipulated within the relevant contract's Force Majeure clause (i.e. as disease outbreak, act of god, epidemic, quarantine, etc.), or (iii) it is decided by a court in a civil case. Obviously, the assessment of Force Majeure in the second and third circumstances depends on case-by-case basis analysis of the effect, circumstances, contract clauses, and efforts of the party to mitigate the situation, whereas, in the first circumstance the existence of Force Majeure depends on a change of law or government action taken as a result of the Covid-19 pandemic.
Subsequent to the issuance of PD 12/2020, there will be a greater opportunity to argue that the Covid-19 outbreak is a force majeure event. The outbreak is now established by the government as a non-natural disaster on a national scale, hence applicable to parties everywhere in Indonesia. However, a party invoking a Force Majeure event due to the Covid-19 outbreak must first be able to prove that it is the outbreak itself which has caused the extreme burden or impossibility of performing the contract.
Referring to the precedents in the previous Sub-Section, the global recession that has caused major economic collapse in Indonesia in 1998 was considered as Force Majeure by the Indonesian court. Accordingly, non-natural disasters such as the Covid-19 may also be seen as an unforeseen event and it may be possible for Indonesian courts to rule it as a Force Majeure event.
Moreover, while the PD 12/2020 can be a basis to indicate that the current condition, namely the national disaster in respect of Covid -19 can be used to showcase the existence Force Majeure, the MPWH Instruction serves more as a conditional affirmation when the Covid-19 is considered a Force Majeure specifically in the construction sector as elaborated below.
The MPWH Instruction
Prior to the Government issuing the PD 12/2020 and the Governmental Regulation No. 21 of 2020 on Large Scale Social Distancing (PSBB) on 31 March 2020 as the implementation of the Law No. 6 of 2018 on Health Quarantine, several ministries had initially issued ministerial regulations, instructions and decrees to overcome any turbulence as a result of the occurrence of the pandemic. The MPWH was one amongst other ministries with its MPWH Instruction.
Essentially, the MPWH Instruction is only binding to the state apparatuses working under the MPWH. The ministerial instruction is not legally binding on the public. Additionally, since the instruction is made pursuant to Presidential Regulation No. 16 of 2018 on Governmental Goods / Services Procurement, we view it to be more relevant to construction service works which involve government aspects. The state apparatuses bound by the MPWH should only be bound with respect to projects where the government is a party, rather than completely private projects.
Furthermore, analysing the MPWH Instruction, there are 3 (three) sets of attachments which contain the crux of the instructions issued by the MPWH.
- The first attachment stipulates the scheme for Covid-19 prevention in construction service works. It sets out the scheme in 4 (four) different approaches, namely (i) the creation of a Covid-19 Preventive Task Force, (ii) the identification of Covid-19 potential risks in the field / workplace, (iii) the provision of health facilities in the field / workplace and (iv) the preventive enforcement of Covid-19 requirements in the field / workplace.
- The second attachment concerns the implications for contracts of construction service works. It elaborates the implications by highlighting the mechanisms of (i) temporarily suspending works, (ii) changes in specifications and (iii) compensation.
- The third attachment deals with the procurement of construction services where accessibility is enhanced by online and offline procurement processes to reflect the prevention scheme of the first attachment.
Continuity of Construction Service Works in Indonesia
The MPWH Instruction is consistent in the first and second attachments that construction service works at risk of Covid-19 contagion must be temporarily suspended. It is noted however that the MPWH does not stress the necessity to put on hold all construction service works in Indonesia.
Instead, construction services are expected to be suspended under force majeure only if (i) the construction site is at high risk because it is located at the epicentre of Covid-19 outbreak, (ii) there are positive virus tests and/or patients under surveillance among the workers, or (iii) there is a regulation from the government to halt construction works by reason of force majeure.
With respect to nationally strategic construction works established pursuant to a presidential regulation, presidential decree, presidential instruction or other similar directives, it would require an additional approval from the MPWH in order to be granted temporary suspension of works.
Notwithstanding the above, the MPWH Instruction mandate that preventive measures such as but not limited to social distancing, awareness, and health standards must still be implemented (regardless of any suspicion of Covid-19 risk) throughout construction sites in Indonesia to maintain maximum health security.
Force Majeure under the MPWH Instruction
As noted above in the section on Force Majeure, the MPWH Instruction may be relevant in arguing Force Majeure in two ways:
Firstly, it conditionally affirmed that Covid-19 may be determined as a Force Majeure to rightfully suspend construction works. If the risk of Covid-19 contagion is imminent at a construction site (as elaborated in the previous sub-section), Force Majeure maybe declared by the Contractor in such project to begin its suspension. We believe the Contractor should be supported by the MPWH apparatuses responsible for the relevant construction project. In any event, arguably PD 12/2020 reaffirms that the risk of Covid-19 is imminent nationally as it is a national-scale disaster.
However, Clients should be reminded that the obligation of the Servicer Provider (i.e. contractor of project) or Servicer User (i.e. owner of project) to compensate the wages of workers, subcontractor, producer, or supplier during the temporary suspension of works due to Covid-19 has not been eliminated. This is in line with the Minister of Manpower Circular Letter No. M/3/HK.04/III/2020 of 2020 on Protection of Worker / Labour and Business Continuity in Preventing and Mitigating Covid-19 which stresses that workers and labourers are still entitled to their wages during the Covid-19 situation in accordance with the prevailing laws. Therefore, any impact of the Covid-19 situation caused to construction service works in Indonesia does not eliminate the obligation to pay wages in accordance to the prevailing laws on manpower or wages.
Please be reminded that under Article 164 (i) of the Manpower Law, the employer is entitled to terminate the employees based on the condition of force majeure. In this case, the employer might be able to exercise termination based on force majeure in reliance on PD 12/2020, with rights and obligations in accordance with the Manpower Law.
Secondly, the issuance of MPWH Instruction may in itself arguably constitute as a Force Majeure event if 'government action' is established as a Force Majeure event within the parties' relevant contract. Since the MPWH Instruction is applicable to construction service works in Indonesia, its issuance may affect the construction works (which must be established by the Force Majeure invoking party). Additionally, the MPWH Instruction as a government action Force Majeure should be viewed in conjunction with the PD 12/2020 which is similarly issued by the government.
In any event, although construction business parties may refer to the MPWH Instruction to establish a Force Majeure event related to the Covid-19 situation, in practice, the assessment of Force Majeure will be conducted on a case-by-case basis by looking at the effect, circumstances, and the effort of parties to mitigate.
Facing the Uncharted Waters
Being faced with an unprecedented situation such as this one, Clients may expect several things from the current situation. To keep construction business running despite obstacles here and there, the sub-section Moving Forward below seeks to elucidate these unfortunate times.
What to Expect?
- Most of the construction service works, especially those related to infrastructure will most likely continue. However, delays and extension of time in construction service works may be expected due to the Covid-19 situation.
- Procurement of construction materials may be heavily impacted, especially those originating from Covid-19 risk countries. Change in specification may be inevitable.
- Payment of wages must still continue in accordance with the prevailing law and regulations in relation to manpower.
- Governmental institutions will most likely issue more legal instruments in relation to Covid-19 in the future.
- Work From Home instructions for several government institutions or the private sector during this Covid-19 situation may impact the performance of the works of the contractors directly or indirectly..
Moving Forward
- Notwithstanding the uncertainties caused by the Covid-19 situation, moving forward, Clients should at their best maximize the preventive measures for the spread of Covid-19. Ensuring the enactment of preventive measures will demonstrate a degree of responsibility in the situation that will weigh positively in the event a force majeure is claimed.
- We note that the MPWH instructed various of its subordinating bodies to cooperate with Construction Service Providers or Service User in detecting the risks of Covid-19 along with conducting observations of the construction working sites. In this respect, it may be beneficial for the relevant party to obtain and utilize the affirmation from the MPWH's subordinating bodies in relation to any occurrence of force majeure.
- Contracting parties should maintain communication on this issue sooner rather than later in hope that mitigation strategies could be established to adapt with the unprecedented Covid-19 situation.
- Pay attention to the possibly of conflicting policies of the central government and the regional governments in addressing the Covid-19 situation.
- Be attentive to the clauses (especially the Force Majeure clause) of all contracts to assess appropriate countermeasures to the current situation. Special attention must be made to whether prior-notification is required to invoke certain relevant clauses in the contract.
- Clients should be aware that the Indonesian Civil Code adopts a conservative view over a force majeure event which only entails in the release of responsibility as a remedy. Therefore, Clients seeking outcomes beside the release of responsibility from force majeure claims should be attentive to the provisions of the relevant contract.
As we progress into this client alert, more and more governmental institutions are issuing their own respective legal instruments to help combat the spread of Covid-19. Nonetheless, we observe that infrastructure development will still remain President Jokowi's goal during the indeterminate times of the Covid-19 situation.
Authors: Prawidha Murti, Partner; Rizki Imral Rakhim, Senior Associate
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