COVID-19 Lockdown: Fortuitous Event or Force Majeure Exemption from Obligations

The entire Luzon has been placed under enhanced community quarantine (ECQ), also called a lockdown, by the President. On 8 March 2020, the President issued Proclamation No. 922, declaring a State of Public Health Emergency throughout the Philippines due to the Corona Virus Disease 2019 (Covid-19). A lockdown was declared on 14 March 2020 over the National Capital Region (NCR), expanded to the entire Luzon effective 17 March 2020. The ECQ has been extended to 30 April 2020; further extended to May 15 in high-risk areas. Local Government Units (LGUs) throughout the Philippines also declared a lockdown in their respective territorial jurisdictions.

The lockdown effectively closed businesses, except entities dealing in essential goods or services. To address the socio-economic impact of the lockdown, the government rolled out social amelioration programs, including the provision of grace period for loans and rentals (both residential and commercial). The grace period simply allows for the extension of the terms of payment, but does not exempt the obligor from subsequently paying the rent. The difficulty in complying with financial obligations, considering the absence of income because of the lockdown, cuts across all businesses and personal transactions, leading to a common question: can individuals or companies be excused from paying or performing their obligations by reason of a fortuitous event?

I. FORTUITOUS EVENT

A fortuitous event refers to extraordinary events not foreseeable or avoidable, events that could not be foreseen, or which, though foreseen, are inevitable. Fortuitous event is synonymous with caso fortuito and force majeure.

[See Refund of Payments for Events Affected by the Community Quarantine: Force Majeure and DTI Guidelines]

The basic rule is that no person shall be responsible for those events which could not be foreseen or which though foreseen were inevitable. 

The matter of fortuitous events is governed by Art. 1174 of the Civil Code which provides that “[e]xcept in cases expressly specified by the law, or when it is otherwise declared by stipulation, or when the nature of the obligation requires assumption of risk, no person shall be responsible for those events which could not be foreseen, or which though foreseen, were inevitable.”

Risk is an exception to the general rule on fortuitous events. Under the law, these exceptions are:

  • (1) when the law expressly so specifies;
  • (2) when it is otherwise declared by the parties; and
  • (3) when the nature of the obligation requires the assumption of risks. 

[See also: Bouncing Checks, Grace Periods and the Enhanced Community Quarantine]

II. ACT OF GOD, ACT OF MAN

A fortuitous event may either be an “act of God” (natural occurrences such as floods or typhoons) or an “act of man” (such as riots, strikes or wars).

The phrase “act of God” became well-known during the 2009 Ondoy flood, when thousands of car owners woke up to the harsh reality that their insurance policies do not include “acts of God” coverage. They cannot claim any amount from the total destruction of their vehicles.

III. CONTRACTUAL PROVISIONS

The provision of Article 1174 must be correlated with other legal provisions. For instance, parties are free to draft their contracts, and may establish such stipulations, clauses, terms and conditions as they may deem fit, as long as the same do not run counter to the law, morals, good customs, public order or public policy (Article 1306, Civil Code).

The contractual stipulations have the force of law between the parties. The Civil Code provides that “[o]bligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith” (Article 1159).

The parties can stipulate in their contracts that the obligations provided therein shall not be affected by fortuitous events or force majeure. This is the reason why contracts, including lease and loan agreements, have a Force Majeure Clause.

IV. ELEMENTS

The determination whether a certain event constitutes force majeure, and whether a person is exempted from liability by reason of such fortuitous event, depends on the concurrence of all the elements of a fortuitous event. The elements of a fortuitous event are:

  • (a) the cause of the unforeseen and unexpected occurrence, must have been independent of human will;
  • (b) the event that constituted the caso fortuito must have been impossible to foresee or, if foreseeable, impossible to avoid;
  • (c) the occurrence must have been such as to render it impossible for the debtors to fulfill their obligation in a normal manner, and;
  • (d) the obligor must have been free from any participation in the aggravation of the resulting injury to the creditor.

All these elements must be present. When the loss is found to be partly the result of a person’s participation — whether by active intervention, neglect or failure to act — the whole occurrence is humanized and removed from the rules applicable to a fortuitous event.

V. DOCTRINE OF UNFORSEEN EVENTS

As noted above, there are provisions related to the application of Article 1174. One such provision is the “doctrine of unforseen events” contained Article 1267 of the Civil Code. It reads: “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”. The requisites for the application of Article 1267 are as follows: 

  • 1. The event or change in circumstance could not have been foreseen at the time of the execution of the contract. 
  • 2. It makes the performance of the contract extremely difficult but not impossible. 
  • 3. It must not be due to the act of any of the parties. 
  • 4. The contract is for a future prestation. 

The difficulty of performance should be such that the party seeking to be released from a contractual obligation would be placed at a disadvantage by the unforeseen event. Mere inconvenience, unexpected impediments, increased expenses, or even pecuniary inability to fulfil an engagement, will not relieve the obligor from an undertaking that it has knowingly and freely contracted. 

VI. ILLUSTRATIVE CASES

Common carriers

Common carriers, by law, are required to exercise extraordinary diligence in their vigilance over the goods and for the safety of passengers transported by them, according to all the circumstances of each case. The source of a common carrier’s legal liability is the contract of carriage, and by entering into said contract, it binds itself to carry the passengers safely as far as human care and foresight can provide. 

Philippine Airlines (PAL) was sued by a passenger who was injured as a result of a hijacking incident of a PAL plane in the 1970s. The hijackers were able to bring firearms onboard the Davao to Manila flight. Under normal circumstances, PAL might have foreseen the skyjacking incident which could have been avoided had there been a more thorough frisking of passengers and inspection of baggages. But the incident in question occurred during Martial Law where there was a military take-over of airport security including the frisking of passengers and the inspection of their luggage preparatory to boarding domestic and international flights. PAL was declared free from liability by reason of a fortuitous event. The highjacking incident, an “act of man,” constitutes a force majeure event beyond the control of the airline.

Financial Agreements

To fund a project, a company secured a syndicated loan during the 1997 Asian Financial Crisis. The company subsequently failed to pay. The debtor-company raised the defense of a fortuitous event (the financial crisis) in a foreclosure action filed by the lenders. The debtor-company was declared liable because one of the elements of a fortuitous even is missing — the loan was secured at the start of the financial crisis. The debtor-company was well aware of the economic environment at that time, yet it still took the risk to expand operations. Moreover, in the loan contract, the parties expressly agreed that any enactment, official action, act of war, act of nature or other force majeure or other similar circumstances shall in no way affect the obligation of the borrowers to make payments.

Lease Agreements 

A lease agreement, for a 5-year period starting in mid-1991, was executed between Globe and Philcomsat for the lease of the latter’s communications facilities. The facilities were intended for use by the U.S. bases. The problem started when the RP-US Military Base Agreement was not renewed when it expired in 1991. The U.S. terminated its communications agreement with Globe which, in turn, notified Philcomsat  in 1992 that it is terminating the lease agreement. Article 1174 exempts an obligor from liability on account of fortuitous events or force majeure, which refers not only to events that are unforeseeable, but also to those which are foreseeable, but inevitable. In their agreement, the parties stipulated that the following events shall be deemed events constituting force majeure:

  • 1. Any law, order, regulation, direction or request of the Philippine Government;
  • 2. Strikes or other labor difficulties;
  • 3. Insurrection;
  • 4. Riots;
  • 5. National emergencies;
  • 6. War;
  • 7. Acts of public enemies;
  • 8. Fire, floods, typhoons or other catastrophies or acts of God;
  • 9. Other circumstances beyond the control of the parties.

Clearly, the foregoing are either unforeseeable, or foreseeable but beyond the control of the parties. There is nothing in the enumeration that runs contrary to, or expands, the concept of a fortuitous event under Article 1174.

VII. APPLICATION IN THE COVID-19 LOCKDOWN 

Check the contract

The first step in determining whether a party to a written contract is exempt from the performance of the contracted obligations (e.g., lease/rent, services, supply, loan), by reason of the COVID-19 lockdown, is to examine the contract itself. 

A written contract usually contains a Force Majeure Clause, similar to the illustrative cases discussed above. There is no hard and fast rule. The clause may provide that the existence of force majeure does not excuse the obligor (e.g., debtor, tenant) from the contracted obligations (for instance, we incorporate this in contracts we review for clients engaged in the business of leasing office spaces and real property). 

On the other hand, the clause may provide that the obligor shall be excused from liability in the event of a force majeure, listing down the events with a catch-all provision citing Article 1179 of the Civil Code. 

The determination of liability, or the absence of such liability, does not end with the existence of a Force Majeure Clause in the contract. While parties are free to make stipulations in their contracts, the stipulation must not run counter to the law, morals, good customs, public order or public policy (Article 1306, Civil Code). The challenge in drafting and/or reviewing a contract is two-fold: ensure that there is a Fore Majeure Clause, and ensure that it is not violative of any law, morals, good customs, public order or public policy.

General Application

At the outset, it is important to note that obligations arising from contracts executed during the ECQ may not be excused by reason of a fortuitous event. This is because the “event” or the lockdown is already known to the parties when they executed the contract. 

In the absence of a contract or in the absence of a Force Majeure Clause in the contract, and by way of general application, there may be enough basis to argue that the lockdown / ECQ constitutes a fortuitous event or force majeure. All the elements appear to be present.

The lockdown/ECQ by reason of the COVID-19 can be considered an unforeseen and unexpected occurrence. A coronavirus contagion is not an unexpected event, as there have been a number of similar contagions in the past. Isolation or quarantine is also foreseen, as this is provided in the applicable law dealing with epidemics. The unprecedented scope of the quarantine, however, appears to have rendered the existing law insufficient, necessitating the passage of a new law granting emergency powers to the President.

The expansive lockdown declared by the government is an “act of man,” a variant of force majeure. At the time of the execution of the contract prior to the lockdown/ECQ, the event was impossible to foresee or, if foreseeable, impossible to avoid. The lockdown/ECQ made it impossible for the obligator/debtor to fulfill their obligation in a normal manner. Only businesses involved in essential goods or services are allowed to operate. In fact, certain violations of the quarantine directives constitute a criminal offense. The obligor/debtor is free from any participation in the aggravation of the resulting injury to the creditor.

Matters arising from the invocation of force majeure during the lockdown / ECQ must be dealt with on a case-to-case basis. There are no hard and fast rules. Each matter has to be dealt with based on the particular facts and the applicable contractual and legal provisions. As noted above, there are numerous related legal provisions which we cannot possibly cover in this post.

VIII. REFERENCES

Mondragon vs. CA, G.R. No. 154188, 15 June 2005; Gacal vs. PAL, G.R. No. L-55300, 15 March 1990; APT vs. T.J. Enterprises, G.R. No. 167195, 8 May 2009; PHILCOMSAT vs. GLOBE, G.R. No. 147324, 25 May 2004; Poon vs. Prime Savings Bank, G.R. No. 183794, 13 June 2016.

Atty.Fred

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