“In practice, the parties in the agreement cannot simply stop due to force majeure. As both of their business is at stake, there needs to be a remedy to the situation caused by force majeure. Among many things, one of the known remedies is by restructuring the debt.”
Two parties agreed with good intention, but then an outside force caused one party to default. This is something that parties in the agreement would always try to prevent, but nevertheless, the risk is always present. This is commonly known as Force Majeure. In general, Force Majeure can be described as extraordinary event or circumstance beyond the control of the parties (such as a war, strike, riot, crime, epidemic or other event described by the legal term as an act of God) which prevents one or both parties from fulfilling their obligations under the contract. While it is quite straightforward in theory, in practice, the parties in agreement can’t simply stop due to force majeure. As both of their business is at stake, there needs to be a remedy to the situation caused by force majeure. Among many things, one of the known remedies is by restructuring the debt.
Force Majeure in Indonesia
Force majeure is an act of God or event beyond the control of both parties. That is the general description, however, it should be noted that no such description can be found in Indonesian Law. The basis of Force Majeure refers to Article 1244 and 1245 of the Indonesian Civil Code which stipulates the followings;
“If there is any reason for breach of obligation, the debtor is to compensate for costs, damages and interests if he/she cannot prove, that the non-performance or the late performance of such obligation is caused by an unforeseen event, for which he/she is not responsible and he/she was not acting in bad faith. The debtor does not need to compensate for costs, damages or interests, if an act of God or an accident prevented him/her from giving or doing an obligation, or because of such reasons he/she committed a prohibited act.”
As can be seen above, the Indonesian Civil Code provides the rights and obligations of the parties in the event of Force of Majeure, but it doesn’t provide the specific description of Force Majeure itself. In practice, referring to Article 1338 of the Indonesian Civil Code, which stipulates the principle of Freedom of Contract, it is common to describe what is considered as Force Majeure in the contract itself. Thus, it is advised to have a clear Force Majeure clause in an agreement to avoid debating over whether an event could be considered as Force Majeure or not when it actually happens.
Debt Restructuring
There has to be a remedy in the event a Force Majeure happens. Specifically, for the Loan Agreement, there exists a remedy called debt restructuring. Referring to Article 1763 of the Indonesian Civil Code, the debtor in Loan Agreement must return the debt of the same amount to the creditor in the agreed time. Still, the variable of Force Majeure would often make the debtor unable to do so. Debt restructuring is a remedy in which the creditor would offer several options to the debtor to restructure the credit to ease off the debt settlement process. Referring to POJK No. 11/POJK.03/2020, there are several restructuring options such as lowering the interest rate, extending the maturity date, increasing credit facility, debt conversion, or even reducing the amount of debt itself. However, this only applies for a loan agreement from the financial services sector, such as bank and leasing. What if the loan agreement is between private business actors outside the financial sector? For other sectors, unfortunately, it is not explicitly regulated, especially when it comes to personal debt between private business actors.
Even though it seems like aid to the debtor, it must be noted that debt restructuring is not the debtor’s right, but instead, creditor’s right. Both the regulation of Bank of Indonesia and OJK provides that financial institution is allowed to give debt restructuring option to the debtor who has difficulties in settling their debt. In other words, while debtor could ask for debt restructuring, it depends on the creditor whether to grant it or not. The same applies to a loan agreement between private business actors outside of the financial sector.
Referring to the rights and obligations of the parties in the loan agreement as stipulated in Article 1754-1773 of Indonesian Civil Code, the rights and obligations of the parties in a loan agreement is only as far as returning the debt in the same amount in the specific time, with additional interest if it’s previously agreed. Referring to Article 1338 of Indonesian Civil Code on the principle of Freedom of Contract, it is up to the parties to amend a contract with a debt restructuring agreement if they think there is a need to do so. It is not a legal right of either party and must be made based on consent between the parties. Thus, it should be noted, especially for the debtor that debt restructuring might not always be an option. The debtor must settle the debt no matter what; a default would expose them to the possibility of a lawsuit and even confiscation of their assets as collateral as stipulated by Article 1131 of the Indonesian Civil Code.
Author: Benedictus Giovanni
Gaffar & Co., Indonesian Boutique Law Firm which specializing and focus on commercial law areas include capital market and financial services.
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