DE DIOS, JENNY-VI S.

4TH YEAR, JD

The coronavirus disease 2019 (COVID-19) is a novel and highly infectious

disease which was unknown before the outbreak began in Wuhan, China. However, in
2020, the rapid spread of the contagious disease claimed thousands of lives worldwide
causing global alarm and pandemonium. The World Health Organization (WHO)
declared the COVID-19 outbreak a pandemic on March 11 to signify its severity and
global coverage and urged countries to take urgent and aggressive action. On March
13, Europe was declared the new epicenter of the virus, as its confirmed cases and
deaths surpassed those of the rest of the world (except China). New cases in Europe
even surpassed those of China at its peak. As of March 19, globally confirmed cases
reached 218,823 and 8,810 deaths. In the Philippines, there are now 217 total
confirmed cases, 17 deaths, and 8 recoveries1.

As a response to the situation, President Rodrigo Duterte issued Proclamation

No. 922, on March 9, 2020 placing the country under a State of Public Health
Emergency upon the recommendation of the Department of Health (DOH).

On March 16, 2020, the entire island of Luzon (including Metro manila) was
placed under an “Enhanced Community Quarantine”. Social distancing was strictly
imposed. The COVID-19 cases in the Philippines during this time were 142 including 12
deaths.

The following day, President Duterte signed Proclamation No. 929, declaring the
Philippine under the State of Calamity for a tentative period of 6 months due to COVID-
1
19. This proclamation enjoins all government agencies and local government units
(LGUs) to render full assistance and cooperation and mobilize the necessary resources
to undertake critical, urgent and appropriate response and measures in a timely manner
to curtail and eliminate the threat of COVID-19.

On March 25, 2020, President Duterte signed the Republic Act (RA) 11469 or the
Bayanihan to Heal as One Act which gave him additional powers to handle the outbreak
of COVID-19 for 3 months (March 25- June 24, 2020). This was after both House of
Congress had an emergency session to act and give the President additional powers.

As a result of these measures, key sectors have been severely affected,

particularly travel and tourism, retail and other services sectors; business operations
hence supply chains disrupted; employment and livelihood put at risk; while consumer
confidence has declined.

With such dire situation, the major questions at the moment are: Do the
measures taken under the state of health emergency exempt debtors from complying
with their contractual obligations? What are the remedies available to those that are no
longer able to fully comply with their contractual obligations?

Do the measures taken under the state of health emergency exempt

debtors from complying with their contractual obligations?

1
Figures for 16 March; Johns Hopkins University Center for Systems Science Engineering Dashboard,
https://gisanddata.maps.arcgis.com/apps/opsdashboard/index.html#/bda7594740fd40299423467b48e9ecf6
 DE DIOS, JENNY-VI S.
4TH YEAR, JD

No, debtors shall still meet their contractual obligations. However, RA 11469 or
the Bayanihan to Heal as One Act, specifically Section (aa) and (bb), to wit:

“(aa) Direct all banks, quasi-banks, financing companies, lending

companies and other financial institutions, public and private, including the
Government Insurance System, Social Security System and Pag-ibig Fund, to
implement a minimum of thirty (30)-day grace period for the payment of all
loans , including but not limited to salary, personal, housing and motor vehicle
loans, as well as credit card payments falling due within the period of the
enhance community quarantine without incurring interest, penalties, fees, or
other charges. Persons with multiple loans shall likewise be given the minimum
thirty (30)-day grace period for every loan;
(bb) Provide for a minimum thirty (30)-day grace period on residential
rents falling due within the period of the enhanced community quarantine, without
incurring interest, penalties, fees, or other charges.” 2

This means that borrowers whose loans falling due within the ECQ period shall
be entitled to avail the 30-day grace period without incurring interest, penalties, fees, or
other charges. All covered institutions shall not charge or apply interest on interest, fees
and charges during the 30-day grace period to future payments/ amortizations of the
individuals, households, micro, small and medium enterprises and corporate borrowers.
3

What are the remedies available to those that are no longer able to fully
comply with their contractual obligations?
2

Aside from the aforementioned law, there are also recognized legal principles
that allow contracting parties relief or release from obligations resulting from extra-
ordinary situations.

A) Caso Fortuito or Fortuitous Event

The law defines Fortuitous Event as an event which could not be foreseen, or
which, though foreseen, is inevitable.4 Fortuitous events by definition are extraordinary
events not foreseeable or avoidable. A fortuitous event may either be an act of God, or
natural occurences, or an of man (force majeure).

Under this principle, no person shall be responsible for a fortuitous event. 5

Hence, the debtor, as a rule, is not liable for any loss or deterioration caused by a
fortuitous event. However, to exempt the debtor from liability for a breach of an
obligation by reason of fortuitous event, the following requisites must concur:
1. The cause of the breach of the obligation must be independent of the will
of the debtor;
2. The event must be either unforeseeable or unavoidable;
3. The event must be such as to render it impossible for the debtor to fulfill
his obligation in a normal manner; and

2
https://www.senate.gov.ph/Bayanihan-to-Heal-as-One-Act-RA-11469.pdf
3
https://www.officialgazette.gov.ph/downloads/2020/03mar/20200401-IRR-RA-11469-RRD.pdf
4
Article 1174; Calalas v. CA, supra.
5
Article 1174, NCC
 DE DIOS, JENNY-VI S.
4TH YEAR, JD

4. The debtor must be free from any participation in, or aggravation of, the
injury to the creditor. 6

On another note, the debtor remains liable for a breach of an obligation by

reason of fortuitous event in the following instances
1. When the law expressly so specifies;
2. When it is otherwise declared by the parties; and
3. When the nature of the obligation requires the assumption of risks.7

The exception of force majeure is not imperative, so a careful scrutiny on the

provisions of the contract is necessary: whether fortuitous event is excluded, whether a
fortuitous clause is provided, what is the definition of fortuitous event provided in the
agreement, what are the formal requirements to raise fortuitous event and what are the
effects of fortuitous event on the agreement. 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.

In any event, the good faith of the contracting party is required as far as the
fortuitous event is concerned. Thus, in order for a fortuitous event to exempt one from
liability, it is necessary that one has committed no negligence or misconduct that may
have occasioned the loss. If the negligence or fault of the debtor coincided with the
occurrence of the fortuitous event, and caused the loss or damage or the aggravation
thereof, the fortuitous event cannot shield the debtor from liability for his negligence. 8

3
B) Loss of the thing due

Under the law, it is understood that the thing is lost when: 1) it perishes, 2) goes
out of commerce, or 3) disappears in such a way that its existence is unknown or it
cannot be recovered. 9 Only a determinate obligation may be extinguished through loss
of the thing due but not an indeterminate or generic obligation. This rule is based on the
principle that the genus of a thing can never perish, genus nunquam perit. 10

In order that the loss should extinguish the obligation and exempt the debtor from
further liability, the following essential requisites must concur:

1. The obligation consists in the delivery of a determinate thing;

2. The loss must be posterior to the constitution of the obligation;
3. The loss or destruction of the thing must have occurred without the fault
of the debtor;
4. The loss of destruction occurs before the debtor has incurred in delay;
and
5. The debtor must not have obligated himself to deliver the same thing to
two or more persons who do not have the same interest.

6
Mondragon Leisure and Resorts Corp v. CA, 460 SCRA 279.
7
Art. 1174, NCC
8
College Assurance Plan v. Belfranlt Development, Inc. 538 SCRA 27.
9
Article1189 (2), NCC.
10
Bunge Corp. and Universal Comm. Agencies v. Elena Camenforte & Company, 91 Phil 861,865 (1952)
 DE DIOS, JENNY-VI S.
4TH YEAR, JD

However, the debtor may still be held liable for the loss of thing caused by
fortuitous event in the following case:

1. When the law expressly provides;

2. When there is a contractual stipulation expressly making the debtor liable
in such a situation; and
3. When the nature of the obligation requires the assumption of the risk of
loss or destruction.11

C) Legal or Physical Impossibility of Performance

The New 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. Article 1266 of the Civil
Code is applicable only to obligations “to do” which include all kinds of work or service.
12
The obligation to pay rentals or deliver the thing in a contract of lease falls within the
prestation “to give”, hence, it is not covered within the scope of Article 1266 of the Civil
Code. 13

It bears stressing that it is insufficient to merely allege impossibility without

showing the factual circumstances that could relieve parties from their obligations. In
4 addition, it should be determined whether performance has become totally impossible to
perform or not. In the latter case, the debtor cannot rely on legal or physical impossibility
as a ground for non-performance.

D) Difficulty beyond the contemplation of the parties

Under the principle of rebus sic stantibus Contracts are generally entered into in
light of certain prevailing conditions. 14 Once such conditions cease to exist, the contract
also ceases to exist. As provided under Article 1267 of the Civil Code “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”. 15 In this case, the court
may release the debtor from his obligation, either wholly or partially depending on the
circumstances and the intention of the parties.

It is noteworthy that Article 1267 of the Civil Code, which enunciates the doctrine
of unforeseen events, is not, however, an absolute application of the principle rebus sic
stantibus, which would endanger the security of contractual relations. The contracting
parties must be presumed to have assumed the risks of unfavorable developments. It is
therefore only in absolutely exceptional changes of circumstances that equity demands
assistance for the debtor. 16

11
Article 1263, par. 2, NCC.
12
Article 1266, NCC.
13
PNCC v. CA, GR No. 116896, May 5, 1997.
14
Naga Telephone Co v. CA, 230 SCRA 351
15
Article 1267, NCC.
16
Philippine National Construction Corp. v CA, GR. No. 116896, May 5, 1997.
 DE DIOS, JENNY-VI S.
4TH YEAR, JD

CONCLUSION:

The above-mentioned principles constitute grounds which a contracting may

consider invoking either as a defense or a means to address potential disputes. Due to
the impact of the pandemic “COVID-19” those who are parties to a contract 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.

Moreover, it is 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.

RECOMMENDATIONS:

1. Review contracts to identify risks and exposure to liabilities that may arise from delays
and/or inability to perform obligations, as well as relevant provisions that may exempt the
party from any such liability.

2. If already deemed necessary to claim force majeure or other contractually stipulated

exemptions from liability, begin the required procedures (i.e. written notices, alternative
remedies, etc.)
3. Take reasonable risk management actions that may mitigate any such potential adverse
effects, and may likewise serve as a badge of good faith in addressing a force majeure
situation.
4. Continue to monitor the developing measures enacted by the government and their
corresponding effects on existing contracts.
5 5. Notwithstanding express stipulations and applicable developments in law, we likewise
encourage parties to keep in mind that the counterparts to a contract may be willing to
commercially negotiate risk or liability mitigation or allocation measures. After all, the
scale of the COVID-19 situation has placed many businesses in the same proverbial
boat.

However, as much as force majeure / fortuitous events can affect additional contractual rights or
trigger exemptions for debtors, they likewise pose a dilemma for creditors on issues of allowing
justifiable delays vis-a-vis enforceability of obligations. Regardless of the nature of the
contracting party, whether as debtor or creditor, businesses should examine COVID-19-related
force majeure /fortuitous events as issues both on enforceability of rights and mitigation of risks.
Businesses are encouraged to take proactive measures and conduct an assessment of the
impact of COVID-19 on their contractual rights and/or obligations. 17

17
https://www.bakermckenzie.com/en/insight/publications/2020/03/covid19-force-majeure-ph