Understanding Business Force Majeure: Definition, Types, Impact, and How to Handle It

The dynamics of the industrial world require entrepreneurs to be tactical, have strategies for various conditions, and tricks to minimize emerging risks. Among the many things to pay attention to, business force majeure is a massive factor that should never be overlooked.

This term comes from French, which translates into Indonesian as “kekuatan kahar” or “great force.” It refers to events that cannot be predicted or prevented, which may cause parties involved in a contract such as you as a business owner to be unable to fulfill their obligations.

As an entrepreneur, including this clause is crucial so that when such conditions occur, you can focus on business recovery without worrying too much about responsibilities to other parties, because businesses affected by force majeure generally require significant attention.

A Deeper Look at the Meaning of Business Force Majeure

Force majeure refers to circumstances that cause one party to fail in fulfilling its contractual obligations to another party due to massive, unpredictable situations. From the business owner’s perspective, these obligations may relate to employees, business partners, or investors, as long as they are clearly stated in the contract or cooperation agreement.

The main purpose is simple: to provide protection to the affected party from legal consequences when such events occur. As an entrepreneur, you can be exempted from all responsibilities and liabilities, if the listed conditions are met.

6 Common Types of Force Majeure in Business

Several sources mention different numbers of force majeure types, but generally, these conditions can be categorized into six types, namely:

Subjective Force Majeure: Focuses on situations where a debtor fails to fulfill obligations due to unforeseen events occurring at the time the contract was made.
Objective Force Majeure: Refers to conditions affecting the object of the contract, for example, the contract being lost or damaged due to natural disasters or other circumstances.
Relative Force Majeure: Flexible in nature or relates to impracticality; obligations or rights can still be fulfilled, but only by incurring significant costs from the obligated party.
Temporary Force Majeure: Applies when obligations and rights are suspended for a certain period but may be fulfilled later.
Absolute Force Majeure: A condition that completely prevents the debtor or business party from fulfilling their obligations or rights at all.
Permanent Force Majeure: Occurs when the involved party is unable to carry out its obligations and rights entirely and forever.

Each of the above types of force majeure can occur, causing businesses to be unable to fulfill their obligations or exercise their rights temporarily or permanently. Clearly, this results in significant losses in business relationships or for the company itself.

Impact of Business Force Majeure on Entrepreneurs

Because of its unpredictable and unavoidable nature, this condition clearly has a significant impact on companies—whether as profit-seeking business entities, employers, or partners with other parties.
There are at least four potential impacts when your company experiences such a situation:

1. Exemption from Contractual Obligations

The affected party can be released from contractual obligations without penalties. For example, in the context of building rental, the agreement can be canceled if a natural disaster destroys the rented building unit.

2. Postponement of Obligations

In some cases, force majeure does not immediately cancel the contract but causes a delay in obligations. This lasts until conditions allow for the obligations to be fulfilled. For instance, a construction project delayed due to a severe storm can resume once weather conditions improve.

3. Renegotiation of Business Contracts

Force majeure can also lead parties involved in a contract or partnership to renegotiate and adjust contract terms. For example, a logistics business unable to meet delivery schedules due to war may renegotiate the maximum delivery deadlines with its clients.

4. Filing Insurance Claims

In certain situations, businesses can file claims under Business Insurance related to the force majeure event, provided they have the necessary coverage and meet the conditions. This can offer additional benefits to the company and you as an entrepreneur, helping to localize and minimize loses

Reviewing Rights and Obligations as an Entrepreneur Facing Force Majeure

Facing difficult conditions will leave you with only a few options. However, even during force majeure, you as a business owner still have rights, although there are clearly obligations that must also be fulfilled.

1. Entrepreneur’s Rights During Force Majeure

Exemption from compensation obligations.
Exemption from breach of contract claims.
The right to suspend obligations.
The right to renegotiate the contract.
The right to terminate the contract.
The right to file insurance claims, provided terms and conditions are met.

2. Entrepreneur’s Obligations During Force Majeure

Prove the existence of force majeure according to applicable procedures.
Notify the relevant parties.
Take strategic steps to minimize losses.
Act with good faith and integrity.
Fulfill any obligations that are still reasonably possible.

Anticipating Business Force Majeure and the Role of Risk Management

The impacts caused by force majeure cannot be avoided and must be faced. However, losses can be managed or at least minimized when you have clear and measurable preventive steps by leveraging available data analysis.

Preventive measures can be implemented in various ways, such as drafting clear contract clauses that include force majeure provisions, diversifying supply chains to manage existing risks, implementing physical and operational preventive actions, conducting training and event simulations, and preparing alternative solutions if such events occur.

On the other hand, the role of risk management is highly significant in reducing potential losses. By applying a clear risk management framework, businesses will have well-defined SOPs when dealing with force majeure.

Basic steps include identifying and analyzing existing risks, mitigating financial impacts, planning for business continuity, ensuring legal compliance and adherence to industry regulations, monitoring risks, and having reliable Business Insurance that can be depended on at any time.

Fundamentally, entrepreneurs must have a strong mindset not only prepared to face losses and competition but also force majeure situations in the industry that can occur at any time.

In addition to understanding what is explained in this article, you should also have reliable Business Insurance that is ready to assist you at any time, such as what PT AXA Insurance Indonesia offers. SmartBusiness Insurance can help you tactically handle business force majeure, so that any losses can be managed more effectively.

As part of risk management in company operations, insurance like this serves as the right safety net to help you stay focused on finding the best steps to take. Contact us now and consult the benefits you can gain with insurance from PT AXA Insurance Indonesia for your business!

Don’t let the unexpected stop your business, secure it now with SmartBusiness Insurance

Reference:

https://kontrakhukum.com/article/force-majeure-pengertian-dasar-hukum-jenis-dan-contohnya/
https://sahabat.pegadaian.co.id/artikel/keuangan/force-majeure-adalah
https://accurate.id/bisnis-ukm/force-majeure/
https://www.bizhare.id/media/bisnis/force-majeure
https://www.sirion.ai/library/contract-clauses/force-majeure/
https://indodax.com/academy/force-majeure/#elementor-toc__heading-anchor-9
https://www.hukumku.id/post/sejauh-mana-penerapan-force-majeure-dalam-kontrak
https://www.jtasyer.com/blog/6999/penerapan-prinsip-keadaan-kahar-dalam-hukum-indonesia
https://www.hukumonline.com/berita/a/5-langkah-mitigasi-risiko-sebelum-dalilkan-force-majeur-di-masa-covid-19-lt5eb516de3cdf3/
https://riskonnect.com/business-continuity-resilience/force-majeure-what-is-it-and-how-does-it-relate-to-business-continuity/

Understanding Business Force Majeure: Definition, Types, Impact, and How to Handle It

Tags

OUR SOLUTION

AXA Insurance

General