Fortuitous Event / Force Majeure

The principle of force majeure provides that no person shall be responsible for a fortuitous
event, i.e., events which could not be foreseen or which, though foreseen, were inevitable. This
may refer to natural occurrences such as floods or typhoons, or an "act of man," such as riots,
strikes or wars. Aside from the event being one that is unforeseeable or unavoidable, the
following must all be established:

 The cause of the breach of the obligation must be independent of the will of the party
seeking to be released from the obligation

 The event must be such as to render it impossible the fulfillment of the obligation in a
normal manner

 The party seeking release must be free from any participation in or aggravation of the
injury to the other party.

No liability attaches notwithstanding a contractual breach when these requisites are present.
The exceptions are: (a) when the law expressly so specifies, e.g. a possessor in bad faith is
liable for deterioration or loss of the thing possessed despite a fortuitous event; (b) when it is
otherwise agreed by the parties, i.e. by contractual stipulation; and (c) when the nature of the
obligation requires the assumption of risks, e.g. business risks that may be inherent in the
nature of the business.

The scope of what constitutes force majeure may be contractually expanded or limited by the
parties. Therefore, companies should (a) review the force majeure clauses of their contracts (b)
assess their exposure under such clauses; and (c) determine whether there is a need to revisit
or renegotiate the same to protect their interests.

Whether a party may invoke force majeure in the context of COVID-19 will ultimately depend on
surrounding factual considerations, including: (a) the particular actions taken by the parties
(e.g., mitigation measures); (b) the nature of the obligations involved; (c) the stature or level of
expertise of the parties; (d) the nature of the subject matter of the contract; (e) the business
risks assumed by the parties, if any; and (f) the damages or disadvantages arising from the
material event.

Legal or physical impossibility

The Philippine Civil Code provides that the debtor in obligations to perform a service shall also
be released when the obligation becomes legally or physically impossible without the fault of
the obligor.

There is legal impossibility when an act is prohibited by law or prevented by law (e.g., non-
renewal of residence and work permit of an employee, preventing him/her from continuing
his/her work). On the other hand, there is a physical impossibility where an act can no longer
be accomplished by reason of its nature. This rule does not apply to obligations "to give", such
as the payment of rentals or the delivery of an object.
It is insufficient to merely allege impossibility without showing the factual circumstances that
could relieve parties from their obligations. In addition, it should be determined whether
performance has become wholly impossible or not (albeit belatedly or to a limited extent). In the
latter case, the debtor cannot rely on legal or physical impossibility as a ground for non-
performance.

Philippine jurisprudence has not provided clear guidance on the distinctions between force
majeure or impossibility. It may be said, however, that while the two principles are related they
nevertheless bear some distinctions. While force majeure focuses on the nature of the event
that resulted to the breach (i.e. whether the event foreseeable or unavoidable), legal or physical
impossibility focuses on the obligation undertaken by the parties (i.e. whether the obligation
become impossible to perform).

In force majeure situations, the events are of such nature that one of the parties is no longer
able to comply with its obligation in a normal manner. While in some instances, there is still a
possibility that the obligation can be complied with, it is no longer possible for the party to be
able to do so in a normal manner, e.g. within the time period agreed upon.

On the other hand, the principle of legal or physical impossibility focuses on whether or not a
party is still able to comply with the obligation. This would include situations where the service
sought to be provided has been rendered impossible to perform by reason of the act of the
other party.

Difficulty beyond the contemplation of the parties

Contracts are generally entered into in light of certain prevailing conditions. Once such
conditions cease to exist, the contract also ceases to exist. Under Article 1267 of the Philippine
Civil Code provides, 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.

It should be stressed that, as a rule, parties to a contract are presumed to have assumed the
risks of unfavorable developments. The principle of extreme difficulty applies only in absolutely
exceptional changes of circumstances and only with respect to obligations to do (e.g. provide a
service), not obligations to deliver objects. In determining whether an exceptional change of
circumstance is present, several factors must be considered, such as the nature of the
obligations involved, the disadvantages arising from the unforeseen event, and the business
risks assumed by the parties.

Loss and destruction of a determinate or generic thing

For obligations to deliver a specific object, the obligation may be extinguished if it is lost or
destroyed without the debtor’s fault, and before the debtor is in delay (Philippine Civil Code,
Article 1262). However, the debtor may still be held liable for such loss or destruction if (a)
there is a contractual stipulation expressly making the debtor liable in such a situation; and (b)
the nature of the obligation requires the assumption of the risk of loss or destruction. As for
obligations to deliver a generic thing, the loss or destruction of such does not extinguish the
obligation to deliver.

Actions to Consider
In general, each of the above-mentioned principles constitute grounds which a parties to a
contract may consider invoking either as a defense or a means to manage potential disputes.
Due to the impact of COVID-19 on business and commercial activities, companies should
expect their respective counterparties to start considering their legal options in relation to these
principles, especially if such counterparties have been encountering difficulties in performing
their contractual obligations. The following are some actions that companies may consider
taking:

1. Review existing contracts, try to anticipate which of these are at risk of being affected
(e.g. production facility closures, delays in the deliveries, and ability of parties to pay) and
determine whether renegotiation of terms is a feasible option.

2. Consider any steps they may be taken in order to avoid or mitigate any potential
adverse impact of COVID-19, e.g. alternative suppliers or alternative delivery methods.

3. Identify available remedies, whether or not provided in the contract, in anticipation of

potential litigation, e.g. mediation/conciliation, dispute boards, and other alternative dispute
resolution mechanisms.

4. Keep abreast of latest developments, including measures undertaken by the

government, as they are relevant to determining the applicable remedies.

5. Consider these action steps in relation to contracts currently being negotiated.