CONTRACTS, FORCE MAJEURE, AND THE COVID-19 VIRUS

by Atty. Oliver S. Yuan

The entire world was shocked by the sudden onslaught of the Covid-19 Virus. The governments in all
parts of the globe have implemented immediate measures to protect its citizens from this invisible
antagonist, Covid-19. In the Philippines, Pres. Rodrigo R. Duterte implemented a strict Enhanced
Community Quarantine (ECQ) in different parts of the country having a high percentage of cases of
Covid-19. The ECQ was implemented in order to prevent the spread of the virus. While our front liners
are doing a heroic act of saving the lives of all those who are infected, another casualty needs serious
help, and that is our economy. The implementation of the ECQ has resulted in a paralysis of business
operations. A great majority of the businesses, if not all, were severely affected. The ECQ resulted in
limited manpower, disruption of supply chains, potential chain reactions of collectability issues, inability
to meet the demands of the customers, missed deadlines, non-delivery of service and goods, both
finished goods and raw materials, and restrictions on commercial operations, and for some businesses,
like the small and medium enterprises, there has been even a stoppage of operations. The concern of
businesses now is to lessen the impact and if possible avoid liability for breach of contract. This concern
of the businesses is also a concern for individuals who have obligations and contracts to fulfill.

CONTRACTUAL OBLIGATIONS AND FORCE MAJEURE

The questions, many ask these days are the following:

1. Is the Covid-19 pandemic considered a force majeure?

2. Can force majeure be used as a legal remedy in order to avoid liability in the failure to perform
contractual obligations?

To answer the questions, let us first define force majeure. Force majeure is also termed as fortuitous
event and in accordance with Article 1174 of the Civil Code of the Philippines, it is an occurrence or
happening which could not be foreseen, or even if foreseen, is inevitable. Force majeure generally
includes acts of God, such as floods, typhoons, and other natural catastrophes, as well as acts of man
beyond the control of the contracting parties such as war, riots, and laws, orders, and regulations
imposed by the government.

As a general rule, there is NO liability in case of failure to perform an obligation due to a fortuitous event
or force majeure. However, there are requisites to exempt an obligor from liability by reason of a
fortuitous event or force majeure, and they are the following:

1. The cause of the breach must be independent of the debtor’s will;

2. The event must either be unforeseeable or unavoidable;

3. The event must such as to render it impossible for the debtor to fulfill his obligation in a normal
manner; and,
4. The debtor must be free from any participation in, or aggravation of, the injury to the creditor.

It is incumbent upon the party charged with the obligation to prove force majeure. Therefore, based on
the definition given under Article 1174 of the Civil Code, the Covid-19 pandemic can be considered as
force majeure or fortuitous event. However, before any person or entity may invoke Covid-19 as a force
majeure to exempt such person or entity from contractual liability, the four (4) requisites mentioned
must be complied with.

Force majeure provision is commonly stipulated in contracts. Despite this common practice, it is
suggested that the exact wordings of force majeure provision be reviewed from time to time because
not all force majeure provisions are worded the same. As mentioned, the Covid-19 pandemic can be
considered as force majeure, as a general rule. However, there are exceptions that can make an obligor
liable despite the occurrence of fortuitous event or force majeure.

The late Dean Ernesto L. Pineda wrote the following exceptions in his book, to wit:

1. When it is expressly stipulated that he shall be liable even if the non-performance of the obligation is
due to fortuitous event. (Art. 1174)

2. When the nature of the obligation requires the assumption of risk. (Art. 1174)

3. When the obligor is in delay. (Art. 1165)

4. When the obligor has promised the same thing to two or more persons who do not have the same
interest. (Art.1165)

5. When the possessor is in bad faith and the thing is lost or deteriorated due to fortuitous event. (Art.
552)

6. When the obligor contributed to the loss of the thing. (Tan Chiong Sian vs. Inchausti & Co., 22 Phil 152

7. When the obligor is guilty of fraud, negligence, or delay or if he contravened the tenor of the
obligation. (Juan F. Nakpil vs. United Construction Co., Inc. vs. CA, 144 SCRA 596; 160 SCRA 334)

The contracting parties may stipulate that a party shall still be held liable even if the party’s failure to
perform his obligation is by reason of fortuitous event or force majeure. When the obligor has already
failed to deliver, either goods or services, before the force majeure occurred, it will not be an excuse.
This is the reason why the force majeure provision of a contract or any part of the contract must be
reviewed from time to time and make sure that there is no agreement between the parties that would
prevent them from invoking force majeure or fortuitous event in exempting such party from liability.
It must be noted that the legal concept of fortuitous event or force majeure and its application, is no
longer necessary for some contracts such as contract of lease and contract of loan. Republic Act No.
11469, also known as the “Bayanihan to Heal as One Act,” 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 a 30-day grace period, without incurring interests, penalties, fees, and
other charges, on residential rents falling due within the period of the ECQ.

In conclusion, invoking Covid-19 pandemic as a force majeure or fortuitous event that may exempt a
person or entity or a contracting party from liability would depend entirely on the wordings stated in the
force majeure provision of the contract or in the wordings of the entire contract. It could either fall on
the general rule or on the exceptions, as defined and provided for by law.
COVID-19 → LOCKDOWN → RETRENCHMENT

by Atty. Oliver S. Yuan

Currently, in many countries around the world, gradual opening of the society and the economy is being
implemented. Governments could feel the economic downtrend caused by the temporary stoppage of
most businesses, due to the pandemic. Despite having no vaccine still, government leaders agree that
they can no longer paralyze the economy. Not only human bodies but also businesses are badly hit by
this pandemic. As a result, many companies need to reduce its manpower, if not totally close its
business.

Even in America, unemployment rate is on the rise. Here in the Philippines, there’s a number of
companies already offering early retirement package to its employees. This is actually called
“retrenchment” under our law. This is a very big concern for most of our labor force. Where will those
retrenched or terminated employees apply for a new job, if most companies are laying off its workers? If
many will be jobless, how can they support their families? We saw that our government’s Social
Amelioration Program (SAP) is not enough to feed the people, in a long period of time. The SAP is a
temporary or a “band aid solution” provided by the government until the time most people can go back
to work and start earning their living again.

The questions, many employees ask these days are the following:

1. What is retrenchment?

2. Is retrenchment legal, especially now that we have a pandemic?

3. What is the procedure for a retrenchment to be valid?

4. How much separation pay should an employee receive in retrenchment?

The act of laying off employees via retrenchment is recognized under our law. Article 283 of the Labor
Code of the Philippines states that an employer may also terminate the employment of any employee
due to the installation of labor-saving devices, redundancy, retrenchment, to prevent losses or the
closing or cessation of operation of the establishment or undertaking. Business entities are legally
allowed to reduce its workforce if it’s necessary and is constrained by economic factors that would
jeopardize its existence or stability. In the case of Paulino Balbalec, et. al. versus NLRC and the Rural
Bank of Bangued (G.R. No. 107756, December 19, 1995), the Supreme Court states that:

“In spite of overwhelming support granted by the social justice provisions of our Constitution in favor of
labor, the fundamental law itself guarantees, even during the process of tilting the scales of social justice
towards workers and employees, "the right of enterprises to reasonable returns of investment and to
expansion and growth. To hold otherwise would not only be oppressive and inhuman, but also counter-
productive and ultimately subversive of the nation's thrust towards a resurgence in our economy which
would ultimately benefit the majority of our people. Where appropriate and where conditions are in
accord with law and jurisprudence, the Court has authorized valid reductions in the workforce to
forestall business losses, the hemorrhaging of capital, or even to recognize an obvious reduction in the
volume of business which has rendered certain employees redundant.”

With the above-mentioned ruling by the Supreme Court, it is clear that retrenchment is a lawful mean
that every employer may implement. It may be a hard and a harsh reality to accept for some employees,
but that is the law. There is a legal maxim, Dura Lex Sed Lex, which means the law may be harsh but that
is the law. Pandemic or no pandemic, retrenchment may be availed of by an employer.

The legal procedure for retrenchment are as follows:

1. That a one-month prior notice be given to the employee and to the Department of Labor and
Employment (DOLE);
2. That a fair and reasonable criteria be used in carrying out the retrenchment program, such as (a) less-
preferred status, (b) efficiency rating and (c) seniority;
3. That proof of the alleged financial losses suffered by the company be produced;
4. Payment of separation pay.

When termination is by reason of retrenchment due to financial reverses, there is no need for the
employer to conduct hearing and investigation because it is not an act attributable to the employee. The
amount of separation pay for retrenchment is one-month pay or at least one-half (1/2) month pay for
every year of service, whichever is higher. A fraction of at least six (6) months shall be considered one
whole year. The Supreme Court, in the case of Lopez Sugar Corporation versus Federation of Free
Workers (G.R. No. 75700-01, August 30, 1990), states that the general standards of retrenchment are as
follows:

“We consider it may be useful to sketch the general standards in terms of which the acts of petitioner
employer must be appraised. Firstly, the losses expected should be substantial and not merely de
minimis in extent. If the loss purportedly sought to be forestalled by retrenchment is clearly shown to be
insubstantial and inconsequential in character, the bona fide nature of the retrenchment would appear
to be seriously in question. Secondly, the substantial loss apprehended must be reasonably imminent, as
such imminence can be perceived objectively and in good faith by the employer. There should, in other
words, be a certain degree of urgency for the retrenchment, which is after all a drastic recourse with
serious consequences for the livelihood of the employees retired or otherwise laid-off. Because of the
consequential nature of retrenchment, it must, thirdly, be reasonably necessary and likely to effectively
prevent the expected losses. The employer should have taken other measures prior or parallel to
retrenchment to forestall losses, i.e., cut other costs than labor costs. An employer who, for instance,
lays off substantial numbers of workers while continuing to dispense fat executive bonuses and
perquisites or so-called "golden parachutes", can scarcely claim to be retrenching in good faith to avoid
losses. To impart operational meaning to the constitutional policy of providing "full protection" to labor,
the employer's prerogative to bring down labor costs by retrenching must be exercised essentially as a
measure of last resort, after less drastic means — e.g., reduction of both management and rank-and-file
bonuses and salaries, going on reduced time, improving manufacturing efficiencies, trimming of
marketing and advertising costs, etc. — have been tried and found wanting. Lastly, but certainly not the
least important, alleged losses if already realized, and the expected imminent losses sought to be
forestalled, must be proved by sufficient and convincing evidence. The reason for requiring this
quantum of proof is readily apparent: any less exacting standard of proof would render too easy the
abuse of this ground for termination of services of employees.”

This article is written to provide information and guidance to those less-fortunate employees who might
be included in the retrenchment program of their respective companies. This also serves as a guide to all
employers wanting to implement this authorized cause for termination, called retrenchment.