COVID-19 as a fortuitous event and its implications on contractual obligations

The coronavirus disease 2019 (COVID-19) is a novel and highly infectious disease which was unknown before the outbreak began in Wuhan, China last December. However, in 2020, the rapid spread of the contagious disease claimed thousands of lives worldwide causing global alarm and pandemonium. Thus, on March 11, the World Health Organization was constrained to characterize COVID-19 as a pandemic.

In the Philippines alone, as of April, the number of COVID-19 cases has significantly increased to a whopping 3,000 cases with fatalities rising to over 100. In response, the Philippine national government and its local government units ordered the implementation of stringent social distancing, alternative working arrangements, strict regulation of the movement of persons and goods and even the temporary closure of private establishments on account of the enhanced community quarantine (ECQ).

Undoubtedly, these measures will have a significant impact on the conduct of business. This includes the incapacity to satisfy clientele’s demands, failure to meet project deadlines, unwieldy delivery of goods and slim workforce. In view of these challenges, parties to commercial contracts may not be able to comply with their obligations. That begs the question: may a party invoke the defense of force majeure to be relieved of its contractual obligation by reason of the COVID-19 pandemic?

Caso fortuito, force majeure or a fortuitous event refers to “extraordinary events not foreseeable or avoidable, events that could not be foreseen, or which, though foreseen, are inevitable.” Renowned civilist, the late Desiderio Jurado, opined that the definition of fortuitous event is “broad enough to comprehend ‘acts of God’ or those which are absolutely independent of human intervention, such as rains, typhoons, floods, cyclones, earthquakes or any other similar calamity brought about by natural forces. It is also broad enough to include force majeure or events which arise from legitimate or illegitimate acts of persons other than the obligor, such as commotions, riots, wars, robbery and similar acts.”

Generally, no person shall be liable in cases of fortuitous event provided that the following elements are present:

a. The cause of the breach of the obligation must be independent of the will of the debtor;

b. The event must either be 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.

Parenthetically, the debtor is responsible for a fortuitous event:

a. When expressly declared by law;

b. When expressly declared by stipulation or contract; and

c. When the nature of the obligation requires the assumption of risk.

Parties, by stipulation or contract, may expand or restrict the ambit of what constitutes a fortuitous event. In certain cases decided by the Supreme Court, the contract may provide for a stipulation imposing liability even in cases of fortuitous events and the same shall be binding upon the parties. The contract may likewise provide for a particular procedure to be observed once an alleged fortuitous event occurs. The prerequisites to be satisfied in the event of force majeure may differ from one contract to another in line with the principle that parties are free to enter into agreements and stipulate as to the terms and conditions of their contract.

Consequently, in order to ascertain whether the COVID-19 pandemic is considered as a fortuitous event, and whether a party is still liable, an examination of the contract, specifically the force majeure clause, is imperative.

If the contract fails to address the respective liabilities of the parties in case of fortuitous event, the provisions of the New Civil Code of the Philippines will apply as it is a basic rule in contracts that the law is deemed written into the contract between the parties.

However, the application of the legal concept of fortuitous event may no longer be necessary for some contracts such as contracts of lease and loan. Republic Act No. 11469, also known as the “Bayanihan to Heal as One,” directs all financial institutions, both public and private, to implement a minimum of a 30-day grace period for the payment of all loans falling due within the period of the ECQ without incurring interests, penalties, fees, or other charges. The said law also provides for a minimum of 30-day grace period, without incurring interests, penalties, fees and other charges, on residential rents falling due within the period of the ECQ.

While the government seems to lean towards considering the COVID-19 pandemic as a fortuitous event, it may, however, be more prudent for affected businesses to examine their existing contracts and determine the effect of the current situation on their obligations and the procedures to be followed to invoke exemptions.

This article is for informational and educational purposes only. It is not offered as and does not constitute legal advice or legal opinion.

Zyra G. Montefolca is an Associate of the Davao Branch of the Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW).

zgmontefolca@accralaw.com