Business and Contractual Disruptions During ECQ – Dealing with Force Majeure Events
Author Atty. Kristine R. Bongcaron
The measures relating to the implementation of the Enhanced Community Quarantine (ECQ) over Luzon and the varying degrees of community quarantine in other areas have resulted in the complete or partial suspension of operations and/or closure of various businesses. This situation has in turn resulted in delays and/or inability of parties to meet their respective local or offshore contractual obligations.
With the effects of the ECQ on business operations, it is expected that legal provisions and contractual stipulations relating to force majeure events and extraordinary changes in circumstance that affect the capacity of parties to perform contractual obligations will be put to test.
Force majeure and its effects
Black’s Law Dictionary defines force majeure as superior or irresistible force, and force majeure risk as when business is disrupted due to a factor beyond control.[1] In the Philippines, a fortuitous event may either be an “act of God,” or natural occurrences such as floods or typhoons, or an “act of man,” such as riots, strikes or wars.[2]
Article (Art.) 1174 of the Civil Code of the Philippines (the “Civil Code”) exempts obligors from liability for non-fulfillment of obligations as stipulated in contracts on account of such events due to their unforeseeable or inevitable nature. Said general rule however does not apply when: (a) it is specified by law; (b) it is otherwise declared by stipulation; and (c) the obligation requires the assumption of risk.
To exempt the obligor from liability for a breach of an obligation due to force majeure, the following requisites must likewise concur: (a) the cause of the breach of the obligation must be independent of the will of the debtor; (b) the event must be either unforeseeable or unavoidable; (c) the event must be such as to render it impossible for the debtor to fulfill his obligation in a normal manner; and (d) the debtor must be free from any participation in, or aggravation of the injury to the creditor.[3]
Extraordinary changes in circumstances
In addition to Art. 1174, other Civil Code provisions limit or exempt liability due to extraordinary changes in circumstances. These are treated in the same manner as fortuitous events.
a. Doctrine of unforeseen events
Article 1267 states that when the service has become so difficult as to be manifestly beyond the contemplation of the parties, the
obligor may also be released therefrom, in whole or in part.
This provision states the doctrine of unforeseen events. This is based on the theory that the parties stipulate in the light of certain
prevailing conditions, and once these conditions cease to exist, the contract also ceases to exist.[4] Considering practical needs
and the demands of equity and good faith, the disappearance of the basis of a contract gives rise to a right to relief in favor of the
party prejudiced.[5]
b. Impossibility of the performance of obligations
Art. 1266 provides that the debtor in obligations to do shall also be released when the prestation becomes legally or physically
impossible without the fault of the obligor. Note that, for the obligation to be considered impossible under this provision, its physical or
legal impossibility must first be proven.[6]
c. Extraordinary inflation or deflation of currency
Art. 1250 on the other hand provides that in case an extraordinary inflation or deflation of the currency stipulated should supervene,
the value of the currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an agreement
to the contrary.
It is important to note that a worldwide trend in increase in prices will not necessarily result in the justified application of this
provision.[7] This will however be applicable in cases of extraordinary inflation. Extraordinary inflation exists when there is a
decrease or increase in the purchasing power of the Philippine currency which is unusual or beyond the common fluctuation in the
value of said currency, and such decrease or increase could not have been reasonably foreseen or was manifestly beyond the
contemplation of the parties at the time of the establishment of the obligation. [8]
d. Lease of rural lands
Particular to lease of rural lands, Art. 1680 states that lessee shall have no right to a reduction of the rent on account of the sterility of
the land leased, or by reason of the loss of fruits due to ordinary fortuitous events; but he shall have such right in case of the loss of
more than one-half of the fruits through extraordinary and unforeseen fortuitous events, save always when there is a specific
stipulation to the contrary.
Extraordinary fortuitous events, in this case, are understood to be: fire, war, pestilence, unusual flood, locusts, earthquake, or others
which are uncommon, and which the contracting parties could not have reasonably foreseen.[9]
Recommendations
It is recommended that business owners review their contracts affected by the ECQ, and determine the relevant force majeure rules that apply (contractual stipulations or by operation of law as above discussed). A review of the relevant force majeure provisions will also assist in compliance of obligations (such notice and mitigation of adverse effects) to address complications brought about by COVID-19 and the imposed quarantine measures.
Business owners, including their counsels, should likewise keep themselves abreast of all laws, regulations and measures issued by competent government agencies. Knowing is key in anticipating contractual fall-outs arising from the ECQ. ECQ-related guidelines and measures issued by authorities would normally contain provisions relating to directives that inhibit business operations, with resulting penalties and remedies, but also the principles and key considerations for the “lockdown” that result to business owners not having any other options but to close or cease operations.
One approach that is best suited to a company that intends to continue operation and keep their business relationships prior to the ECQ is to map out a plan that either mitigates the impact of the ECQ or voluntarily compensates the counterparty from the effects thereof. This is contract management. While doing this, it is, of course, essential that a company also lays out a general plan involving remedies and courses of actions. This is dispute management.
The idea of compensation must be looked at from a perspective of one’s inability to actually mitigate the impact during the period of crisis resulting to non-performance of an obligation. In such a case, the party unable to fulfill obligations must be prepared to approach the other party and explore acceptable alternative schemes to satisfy its end of the deal.
Moving forward, prudent business owners must consider writing into their agreements force majeure provisions to define and/or control liability in case such events occur during the lifetime of their contracts so as not to be dependent on legal provisions alone. It is also helpful to stipulate on the definition of force majeure, procedures for notice to the other party, measures for mitigation, and extended periods for completion of obligations. Likewise, parties may want to include force majeure as a cause for modification of the instrument and/or termination of contracts.
These considerations will of course depend on the type of contract. For instance, service agreements may benefit from additional provisions defining periods for extension in fulfilling obligations the performance of which was affected by the fortuitous event. Distribution agreements may expand their definition of force majeure to expressly cover delays in transportation and inability to obtain supplies of raw materials. Construction agreements may include modifications in determining delays on account of force majeure.
It has been recognized that operations and expected profits of a business venture are subject to hazards due to the occurrence of fortuitous events.[10] If such were to happen parties are at risk not only of not reaping any profits from their investments but of incurring losses. This cannot be more apparent now. As always, having measures in place to address difficulties arising from fortuitous events and being ready to implement them at the appropriate time provide much needed leeway for companies to adjust once fortuitous events come to pass.
[1] 2nd Edition, Black’s Law Dictionary. https://www.freelawdictionary.org/?s=force+majeure. Last accessed on 16 April 2020, at 8:47 p.m.
[2] Philippine Communications Satellite Corporation vs. Globe Telecom, Inc. G.R. No. 147324, 25 May 2004.
[3] Florencia Huibonhoa vs. Court of Appeals, G.R. No. 95897, 14 December 1999.
[4] Rebus sic stantibus in public international law; Naga Telephone Co., Inc. vs the Court of Appeals, G.R. No. 107112, 24 February 1994.
[5] Ibid.
[6] Delfin Gonzalez, Jr. vs. Magdaleno M. Peña, G.R. No. 214303, 30 January 2017.
[7] Florencia Huibonhoa vs. Court of Appeals, G.R. No. 95897, 14 December 1999.
[8] Ibid.
[9] Par. 2, Art. 1680 of the Civil Code.
[10] Nielson and Company, Inc. vs. Lepanto Consolidated Mining Company, G.R. No. L-21601, 28 December 1968.