With the Covid-19 pandemic and the lockdown imposed by the government wreaking havoc on the local economy, businesses are scrambling to fulfill contractual obligations amid the unforeseen situation.
According to law firm DivinaLaw, local companies can invoke force majeure as a defense because the pandemic is considered an inevitable or fortuitous event that no one foresaw and even if foreseen, it was impossible to avoid.
Nilo Divina, managing partner of Makati-based DivinaLaw, said in an online press briefing that it is evident that the Covid-19 outbreak is a fortuitous event, but the debtor must assess if the pandemic prevents them from complying with the obligation or if it places any contributing factor that prevents the fulfillment of an obligation.
Although enterprises can opt for a force majeure defense on failure to deliver any determinate thing or service, it will be a different matter when it comes to payments, Divina stressed.
In the case of Gaisano Cagayan Inc. vs Insurance Company of North America (G.R. No.147839, 8 June 2006), the debtor’s failure to make payment by reason of a fortuitous event that occurred will not relieve that party of its liability.
Divina said it must be noted that a debtor can make a case that the pandemic and corresponding government restrictions directly affected its ability to act on or fulfill the obligation.
Institutional lenders, meanwhile, cannot charge or collect penalty interest for failure to pay the obligation. Instead, the debtor should only deliver the principal amount, he said.
Even if force majeure is not available as a remedy, Divina said there are still other strategies that can be adopted – request for time extension, renegotiate the pre-existing terms of the agreement, or telling the creditor that it will be forced to file a petition for liquidation.
But the debtor, according to Divina, must ensure that there are no factors or fault attributed to them and that the creditor is willing to cooperate.