THE RAPID and exponential spread of the novel coronavirus disease 2019 (COVID-19) stunned and stifled lives and activities all over the world. In the Philippines alone – based on the latest COVID-19 tracker of the Department of Health (DOH) this early April – the infected count already breached the five-thousand mark of Filipinos testing positive for the disease coupled with a rising number of casualties.
For this generation, it has also brought a key phase at the forefront: the “new normal”.
As the entirety of Luzon remains in an Enhanced Community Quarantine (ECQ) with a growing number of Philippine localities, such as cities and provinces in Panay, placed under similar mobility restrictive measures, the “new normal” forced economic activity across almost all non-essential industries to suddenly undergo drastic work stoppage – if not reduced to skeleton operations. The consequences thereafter rapidly unfold: a nosedive in income and productivity; closure of businesses; retrenchments; and maybe more common, obligations that are rendered unmanageable and almost impossible to perform, among others.
In all of these circumstances, it is imperative to know one’s legal rights and options in order to make fully informed and rational decisions even in these times of uncertainties.
For those currently tied to any pre-existing contractual obligations – and especially if the disruption brought about by COVID-19 has made a significant impact in those – now is the best time to re-examine your contracts and determine whether you can seek a temporary (or permanent) shelter under the principle of force majeure.
In essence, the principle of force majeure can excuse any person or entity from complying with an obligation – for example: delivery of goods; performance of services – so long as there exists unforeseen events or circumstances which are beyond such contracting person or entity’s reasonable control.
For contracts governed by Philippine laws, under Article 1174 of the Civil Code of the Philippines, the principle of force majeure spells out that no person shall be responsible for a fortuitous event or those events which could not be foreseen or which, though foreseen, were inevitable. Generally, examples of these events can be war, terrorism, epidemics, or plagues. It may also include governmental acts such as travel restrictions, trade embargoes, or quarantines.
Keep in mind, however, that there must be no human hand, lack of foresight, and absence of sound judgment during the said fortuitous event which have made or contributed to the impossibility of performing or complying with the obligation. An example of this is the 1997 Asian Financial Crisis which, as the Supreme Court held in Mondragon Leisure and Resorts Corporation v. Court of Appeals, is not among the fortuitous events contemplated under Article 1174 of the Civil Code. Here, while certain events may be unforeseeable at the start (i.e. COVID-19), there may well be circumstances which, by use of one’s prudent judgment, can still be beyond one’s control. The decision to build and develop real estate for instance amidst a looming financial crisis is an example of this. In the same manner, taking a car loan, for instance, in the middle of the COVID-19 crisis will not likely excuse you from reneging on your loan payment obligations.
In addition, it is also necessary to determine if the force majeure clause in your contract is ‘open’ or ‘exhaustive’ in relation to the list of force majeure events – meaning whether or not it contemplates of any scenario that can be classified as unforeseen. For purposes of the COVID-19 crisis, you should check whether an ‘outbreak’ or ‘pandemic’ (or any similar event) is included or excluded.
Thus, depending on the construction of the force majeure clause in your contract and the attending factual circumstances, COVID-19 may be considered as a fortuitous event that can excuse you from complying with an obligation – subject to a process called “rescission”. Force majeure clauses also sometimes provide for extension of time, suspension of time, or termination in the event of continued delay or non-performance.
Subject to other clauses of your contract, should you seek to rely on the force majeure clause to rescind your contract, you must first show that the force majeure event was the cause of the inability to perform or delayed performance; second, that the non-performance was due to circumstances beyond your control; and third, there were no reasonable steps that you could have taken to avoid or mitigate the event or its consequences. In the event that the force majeure clause is not defined in your contract, your failure to comply with your obligation may hold you liable for the payment of damages unless the courts rule otherwise. Moving forward, adding this clause in your contracts may better prepare you for another unforeseen event in a world that may be disrupted by another “new normal”.
Should the contract be rescinded based on force majeure, the existing obligations of the contracting parties shall be extinguished thereby restoring (as far as possible) the parties to their prior conditions before the contract took effect. This is without prejudice to the right of the aggrieved party to claim and prove damages due him.
Finally, aside from the principle of force majeure, you may also check and/or resort to other clauses in the Civil Code to determine your contractual rights and obligations. These rules exist despite any fortuitous event (hence, with or without COVID-19).
One such rule is that person with an obligation “to do” something can renege on his obligation in the event of legal or physical impossibility to do such obligation. There is a physical impossibility where an act can no longer be accomplished by reason of its nature. On the other hand, there is legal impossibility when an act is prohibited or prevented by law. As a caveat, similar to the principle of force majeure, the person claiming to break away from the obligation must establish that best efforts were exerted to comply with what is expected from him and that he did not do anything to prevent its compliance. Note that this rule does not apply in obligations “to give” such as the payment of a loan.
At the end of the day, considering the current global situation, it is best for both parties to have a constructive dialogue as to the interpretation and enforcement of their contract. Keep in mind also that given that COVID-19 has drastically hampered court operations, the best recourse for the parties at present is to exercise reasonableness and fairness in dealing and moving forward with their present obligations, taking into consideration that everyone is ultimately affected by this crisis.
Nevertheless, while COVID-19 may have paralyzed our physical mobility, the law and our rights are still in effect. As a legacy of this “new normal”, do take extreme care and caution in drafting force majeure provisions in your future contracts in order to protect your legal interests.
***
ATTY. MARK S. GORRICETA is the Managing Partner and head of the Corporate Group of Gorriceta Africa Cauton & Saavedra www.gorricetalaw.com. He is a well-recognized expert in the fields of Capital Markets, Securities Law, Mergers & Acquisitions, Technology Law and Real Estate./PN
