376 DOI: https://doi org/10 21776/ub arenahukum 2023 01602 8 Volume 16 No 2 (Agustus) 2023 : pp 376-395 e-ISSN:2527-4406 Faculty of Law, Universitas Brawijaya, Malang p-ISSN:0126-0235 Indonesia
https://arenahukum.ub.ac.id/index.php/arena
GOOD FAITH VERSUS BAD FAITH IN MITIGATING THE COVID-19 PANDEMIC IN INDONESIA
Yafet Yosafet Wilben Rissy
Faculty of Law, Satya Wacana Christian University Jl. Diponegoro No.52-60, Salatiga, Kec. Sidorejo, Kota Salatiga
Email: [email protected]
Disubmit: 22-06-2021 | Direview: 28-02-2022 | Diterima: 03-06-2022
Abstract
The COVID-19 pandemic has caused a real economic crisis across the globe, including Indonesia. To overcome this critical issue, the Indonesian President issued Government Regulation in Lieu of Law No. 1 of 2020 which was later stipulated as Law No. 2 of 2020 (the 2020 COVID-19 Emergency Law). This study applies a doctrinal legal research method. The result of the study shows that Article 17 of the 2020 COVID-19 Emergency Law grants the government officials the right of immunity to not be sued legally as long as their actions are in accordance with the good faith principle. Unfortunately, this law does not explain the meaning of good faith, so that it can become a grey area for the abuse of power. It is recommended that the government officials should be mindful in exercising their extraordinary powers based on the principle of good faith such as honesty, loyalty, trust, honour, a lack of fraudulent actions and conflict of interests, and adherence to the applicable laws to avoid an abuse of power and corruption in Indonesia.
Keywords: Bad Faith; COVID-19 Pandemic; Good Faith; Legal Liability.
Abstrak
Untuk mengatasi pandemic Covid-19, Presiden Indonesia mengeluarkan Peraturan Pemerintah Pengganti Undang-Undang Nomor 1 Tahun 2020 yang kemudian ditetapkan menjadi Undang- Undang Nomor 2 Tahun 2020 (UU Darurat COVID-19 2020). Studi ini menggunakan metode penelitian hukum doktrinal. Hasil studi menunjukkan bahwa Pasal 17 UU Darurat COVID-19 2020 memberikan hak kekebalan kepada pejabat pemerintah untuk tidak digugat secara hukum sepanjang perbuatannya sesuai dengan prinsip itikad baik. Sayangnya, undang- undang ini tidak menjelaskan arti itikad baik, sehingga dapat menjadi wilayah abu-abu bagi penyalahgunaan kekuasaan. Direkomendasikan agar para pejabat pemerintah perlu berhati-hati dalam menjalankan kekuasaannya yang besar berdasarkan prinsip itikad baik seperti kejujuran, kesetiaan, kepercayaan, kehormatan, ketiadaan tindakan curang dan benturan kepentingan, serta kepatuhan terhadap hukum yang berlaku untuk menghindari penyalahgunaan kekuasaan dan korupsi di Indonesia.
Kata kunci: Itikad Baik; Itikad Jahat; Pandemi COVID-19; Pertanggungjawaban Hukum.
Introduction
To mitigate the negative aspect of the COVID-19 pandemic, particularly from an economic side, the Indonesian President issued Government Regulation in Lieu of Law No. 1 of 2020 which was later stipulated as Law No.
2 of 2020 (the COVID-19 Emergency Law).1 The 2020 COVID-19 Emergency Law was issued by the Indonesian President in April 2020 or four months after the outbreak of COVID-19 in late December 2019.
The concern at that time was the collapse of Indonesia’s economic growth and the economic crisis it caused.2
The granting of these extraordinary powers in this emergency law is understandable as it is more compatible with the economic crisis.
Such a flexible rule of law approach is needed by the government as it also offers a sufficient means to mitigate the crisis such as to intervene and take some discretionary decisions, and to formulate, issue, and implement the laws and/
or policies that are most suitable to overcome the crisis.3
The 2020 COVID-19 Emergency Law of 2020 provides several extraordinary authorities to the government, both central
1 Law No. 2 of 2020 concerning the Establishment of Government Regulation in Lieu of Law No. 1 of 2020 concerning State Financial Policy and Financial System Stability for Handling the 2019 Corona Virus Disease (COVID-19) Pandemic and/or in the Context of Facing Threats that Endanger the National Economy and/or Financial System Stability (the 2020 COVID-19 Emergency Law).
2 One year after the crisis, Indonesia’s economic growth experienced a contraction, -2.2% in 2020 while in 2019 it reached 5.2%. To see more on other economic performances, see The World Bank, ‘Indonesia’s Economic Prospects, December 2020: Towards a Secure and Fast Recovery’. https://www.worldbank.org/en/
country/indonesia/publication/december-2020-indonesia-economic-prospects, accessed 22 May 2021.
3 See Yafet Yosafet Wilben Rissy, “Pergeseran Negara Hukum ke ‘Negara Himbauan’: Menakar Dampak Regulasi Penanganan COVID-19 terhadap Perekonomian dan Keuangan Indonesia”, Jurnal Hukum Bisnis Bonum Commune Vol. 3, No. 2, (2020): 224, diakses 12 April 2020, doi: https://doi.org/10.30996/jhbbc.
v3i2.3478.
4 Ibid, Articles 2 to 26 of the 2020 Covid-19 Emergency Law.
and local levels, to take any necessary steps needed in the area of state financial policies and financial sector stability policies, including refocusing and reallocating the central and local governments’ budgets, offering tax and customs incentives, issuing government bonds or government sharia bonds, strengthening the role of the Financial Stability Sector Committee (FSSC), and improving the authority of the Financial Services Authority (FSA) and the Deposit Insurance Corporation (DIC), including granting the authority to the central bank (Bank Indonesia) to offer short- term loan facilities for banks experiencing liquidity distress due to the COVID-19 pandemic.4
However, aspects of legal substance and legal procedures related to accountability for the use of extraordinary powers in the COVID-19 pandemic are not clearly formulated. Hence, it can be argued that based on the unlimited discretionary powers held by the government officials, they are allowed to do whatever they can to overcome the crisis.
There is only a minimum and normative principle regarding the aspect of legal liability for the use of extraordinary authority. Article
27 Paragraph (1) (2) (3) of the 2020 COVID-19 Emergency Law states:
(1) Any costs that have been spent by the Government and/or members of the FSSC in the context of implementing state revenue policies including policies in the field of taxation, state expenditures, including policies in the regional finance sector, financing policies, financial system stability policies, and national economic recovery programs are part of the economic costs to save the economy from the crisis and are not considered as a loss of the state.
(2) Members of the FSSC, the Secretary of the FSSC, members of the FSSC secretariat, and officials or employees of the Ministry of Finance, Bank Indonesia, the Financial Services Authority, and the Deposit Insurance Corporation, and other officials related to the implementation of this Government Regulation in Lieu of a Law, cannot be sued both civilly and criminally if in deploying their duties it is based on good faith and in accordance with the provisions of the laws and regulations.
(3) All actions including decisions made based on this Government Regulation in Lieu of a Law are not the object of a lawsuit that can be submitted to the state administrative court.
Yet, instead of providing principles or guidelines for accountability for the use of such extraordinary powers, Article 27 paragraphs
(1) (2) (3) of the 2020 COVID-19 Emergency Law even provides a blanket guarantee for the decision-makers in the form of protection from all kinds of lawsuits. One of the instructions related to the aspect of legal liability for the use of extraordinary powers only states that all actions cannot be prosecuted (criminal, civil, and state administration) if they are carried out in good faith.
Unfortunately, the COVID-19 2020 Emergency Law does not provide adequate the principles needed to exercise these extraordinary powers. Article 27 (3) of the 2020 COVID-19 Emergency Law only generally and normatively stipulates that all these extraordinary powers should be conducted based on good faith principle and there are no further explanations on the concept of good faith itself. This could lead to misunderstanding and multi interpretation on the concept of good faith which in turns could lead to abuse of power and unlimited exercise of discretionary powers.
Up to date, it has to be acknowledged that some debates and analysis over this issue have been arisen in the public space in Indonesia.
Unfortunately, the debates and analysis have been conducted in sporadic and unsystematic ways where the concept of good faith and bad faith have not been deeply scrutinized.
For this reason, it is vital to examine the COVID-19 2020 Emergency Law critically and systematically as far as it relates to the concept and application of good faith and bad faith in mitigating the Covid-19 pandemic in
Indonesia.
This study applies a doctrinal legal research method, a method that offers a systematic explanation of a particular legal category, provides rules-relationship analysis, explains difficult areas of the rules, and possibly predicts future developments.5 This article will provide a discussion on how to overcome the minimum explanation of good faith in the 2020 COVID-19 Emergency Law by offering a deeper explanation of the concept of good faith, bad faith from the perspectives of business law, mainly contract law, business/trade contract law, and corporate law which can significantly contribute to a proper understanding and application of the concept of good faith. It is expected that by having a proper understanding on the qualities of good faith and bad faith, the abuse of power (moral hazard) in the pandemic context can be prevented and the negative economic impacts of the COVID-19 pandemic can be mitigated by the government.
To do so, this article has four main problems to be addressed, namely, a) discussion of the concept and function of good faith. It then proceeds with a review of the doctrine of good
5 Dennis Pearce, Enid Campbell and Don Harding, ‘Australian Law Schools: A Discipline Assessment for the Commonwealth Tertiary Education Commission’, Australian Government Publishing Service, Vol 3 (1987) p.17.
6 See Arthur Hartkamp, “Judicial Discretion Under the New Civil Code of the Netherlands”, American Journal of Comparative Law Vol. 40, No. 4, (1992): 551.
7 Alberto M. Musy, “The Good Faith Principle in Contract Law and the Pre-contractual Duty to Disclose:
Comparative Analysis of New Differences in Legal Cultures”. https://core.ac.uk/download/pdf/6929225.pdf, accessed 4 April 2021.
8 Ibid, p. 4.
9 Tommaso Febbrajo, “Good Faith and Pre-Contractual Liability in Italy: Recent Developments in the Interpretation of Article 1337 of the Italian Civil Code”, The Italian Law Journal Vol. 2, No. 2, (2016): 211.
faith versus bad faith b) under the perspective contract law, and c) under the light of corporate law. d) The article then constructs a point of contact between the doctrines of good faith and bad faith and the above two perspectives (contract and company laws) and provides clear guidelines to the government officials when deploying their extraordinary powers to mitigate the COVID-19 pandemic.
Finally, this article provides a number of conclusions and suggestions for the government officials to effectively and responsibly use their extraordinary powers in the context of mitigating the COVID-19 pandemic, based on the principles of good faith and in accordance to the applicable laws and regulations.
Discussion
A. On the definition of good faith and its functions
Good faith is a doctrine that has been recognized for a long time in the civil law tradition back to ancient Roman times, which was later adopted in civil codes in various countries with civil law traditions such as the Netherlands,6 France,7 Germany,8 Italy,9
Japan,10 China,11 Indonesia,12 and many more.
The doctrine of good faith is then widely applied in contract laws in general, particularly trade/business contract laws and company laws.
What is the doctrine of good faith? Even though the doctrine of good faith has been used for hundreds of years, it turns out that defining good faith is not an easy task. Good faith, said Robert Kolb, is easier to explain in terms of its practical function rather than be defined in an abstract concept.13 Good faith, in Professor Summers’ view, is more of an
‘excluder’ concept, a phrase which has no general meaning or meaning of its own but neglects many forms of bad faith.14 However, for the purpose of this article, the author defines good faith as a condition or a character that is characterized by honesty, fairness, truth, loyalty, the absence of fraudulent acts, and the absence of taking advantages or benefits for something that is not their right.
In the context of a contract, generally good faith is divided into three types, namely good faith in a subjective sense, good faith in an open-ended legal standard, and good faith in an objective sense. Firstly, good faith can be considered in a subjective sense. In its
10 Yasuhei Tanuguchi, “Good Faith and Abuse of Procedural Rights in Japanese Civil Procedure”, Tulane Journal of International and Comparative Law Vol. 8, (2000): 167.
11 Chunlin Leonhard, “A Legal Chameleon: An Examination of the Doctrine of Good Faith in Chinese and American Contract Law”, Connecticut Journal of International Law Vol. 25, No. 2, (2010): 305.
12 Article 1338 of Indonesia Civil Code (KUHPerdata).
13 Robert Kolb, “Principles as Sources of International Law (With Special Reference to Good Faith)”, Netherlands International Law Review Vol. 53, No. 1, (2006): 13.
14 Robert S. Summers, “Good Faith” in General Contract Law and the Sales Provisions of the Uniform Commercial Code”, Virginia Law Review Vol. 2, (1968): 196.
15 Ibid, p. 14.
16 Ibid.
subjective meaning, good faith is more of a moral concept, trying to introduce into law the measure of honesty, truth, a fair contract, trust, and the absence of a crime. In this sense, good faith is a state of mind.15
Secondly, in its meaning as a concept of open legal standards (good faith in the sense of an open-ended legal standard), good faith contains large, open, and flexible legal standards that can be applied in various cases and situations, and which can also be seen as supporting and autonomous legal standards.
In its meaning as an open legal standard, good faith can be an ancillary legal standard. The concept of ‘reasonableness’, for example, can be used to consider a number of contextual aspects: from policy reasons, effectiveness, reasoning, and nature of the law, equity intra legem (interpretation to the application of the law by courts to achieve justice), effectiveness (useful effect and useful interpretation to achieve legal goals), and consideration of the consequences of an action.16
Furthermore, in its meaning as an open legal standard, good faith can also be an autonomous legal standard, where the executors (judges, arbitrators) have autonomous considerations (in themselves) to implement certain legal
concepts such as equity, good will, and good faith. In practice, it is expressed in the adage of acting according to ex aequo et bono and acting according to universal legal principles.17
Thirdly, good faith can be viewed in an objective sense. There are three principles required in good faith in an objective sense, namely: a) protection of legitimate expectations to ensure certainty and stability.
In the 19th and 20th centuries, the terminology often used was ‘the faithfulness to the deed undertaken’; b) protection of certain public interests from excessive individual desires, such as the prohibition not to intrude on the rights of others; and c) prohibition of non-loyal conduct, such as the principle of not taking advantage of one’s own mistakes (nemo ex propria turpitudine commodum capere potest).18
The next question is what is the function of good faith? The functions of good faith are slightly different from one to another country, even though they are inherited by and implemented in a civil law system. In Italy, good faith has a complementary function (funzione integration) and an evaluative function (funzione valutativa). In the Netherlands, good faith has a complementary function (aanvullende werking) and a limiting function (beperkende werking).19
Meanwhile, good faith in Belgium has three
17 Ibid.
18 Ibid.
19 M. W. Hesselink, The Concept of Good Faith, in A. S. Hartkamp, M. W. Hesselink, E. H. Hondius, C. Mak,
& C. E. du Perron (Eds.), Towards a European civil code - 4th rev. and exp. ed. (pp. 619-649), (Alphen aan den Rijn: Kluwer Law International, 2011), p.6.
20 Ibid.
functions, namely: a) an interpretive function (fonction interpretative), b) a complementary function (fonction completive), and c) a restricting or limiting function (function restrictive).20 Thus, in general, good faith has four functions, which are a complementary function: a function to complement an existing law, an evaluation function: a function to assess an existing law, an interpretive function: a function to interpret existing law, and a limiting function: a function to restrict an existing law.
B. Good faith versus bad faith: A contract law perspective
Good faith has been used extensively in business/trade contracts, especially in countries with civil law traditions such as France, the Netherlands, Germany, Italy, Indonesia, and so on. In Indonesia, for example, the doctrine of good faith can be seen in Article 1338 (3) of the Civil Code: a contract must be made in good faith. The doctrine of good faith is also adopted in Article 6 (1) and Article 4 (6) of the 1999 Arbitration and Dispute Resolution Law.
Unfortunately, there is no further explanation regarding the concept of good faith in the above two legal instruments. But this is not just the case in Indonesia. In many civil law countries, good faith is stipulated in the civil code with little or no explanation. For example, Article 242 of the German Criminal Code emphasizes
the obligation to carry out agreements with good faith by taking into account customary practices.21 Meanwhile, in France, Article 1134 (3) of the Civil Code states firmly that a contract must be made in good faith.22
However, to some extent, good faith has also been adopted in countries with a common law tradition through case law or court verdicts, regulations, and even commercial codes. In Australia, good faith is adopted in trade contracts that are reinforced by court decisions related to the elements that support the fairness of a trade contract.23 In the United Kingdom, good faith is even adopted in a written legal form as seen in Article 4 (1) of the Unfair Terms in Consumer Contract Protection Regulation of 1994.24 Even in America, good faith is adopted in the articles of the Uniform Commercial Code (UCC), a code that uniforms all sorts of commercial laws in America that was declared and proposed to the states for adoption in 1951.25
Due to the fact that good faith in the Civil Codes in many civil law countries only provides general statements, it is necessary
21 Anonymous, “German Civil Code 1896”. http://www.fd.ulisboa.pt/wp-content/uploads/2014/12/Codigo- Civil-Alemao-BGB-German-Civil-Code-BGB-english-version.pdf, accessed 3 June 2021.
22 Anonymous, “French Civil Code 1804”. http://files.libertyfund.org/files/2353/CivilCode_1566_Bk.pdf, accessed 3 June 2021.
23 William Michael Dixon, “An Examination of the Common Law Obligation of Good Faith in the Performance and Enforcement of Commercial Contracts in Australia”. A Doctor of Juridical Science Thesis, (Queensland:
School of Law Queensland University of Technology, 2005), pp. 26-30.
24 Anonymous, “Statutory Instruments 1994 No. 3159, Consumer Protection, The Unfair Terms in Consumer Contracts Regulations 1994”. http://www.legislation.gov.uk/uksi/1994/3159/made, accessed 3 June 2020.
This regulation was made as a follow-up of the European Commission Council Directive 93/13/EEC. See also Gunther Teubner, “Legal Irritants: Good Faith in British Law or How Unifying Law Ends Up in New Divergences”, Modern Law Review Vol. 61, No. 1, (1998): 11.
25 As an example, see Govinfo, “the UCC 1963 for the District of Columbia”. https://www.govinfo.gov/content/
pkg/STATUTE-77/pdf/STATUTE-77-Pg630.pdf, accessed 3 June 2021. Up to date, the UCC has been adopted in 50 states across the USA. See also, Uniformlaws, “The Uniform Law Commission. Summary of the Uniform Commercial Code (UCC)”. https://www.uniformlaws.org/acts/ucc, accessed 3 June 2021.
26 M. W. Hesselink, Op. Cit, pp. 628-634.
to focus on experts’ opinions regarding the application of good faith in trade/business contracts. According to Hesselink, in principle, good faith that is used in trade contracts covers several main issues, namely: a) contract formation: the issues to be considered in pre-contractual good faith like do not take advantage of other parties because of a certain position (financial reason, social status, circumstance); b) contract validity: violation of good faith can terminate an agreement; c) contract interpretation: based on law or court verdicts; d) contract content: duty of loyalty, duty of care, duty to protect, duty to inform;
e) contract parties: only parties who agree with and sign the contracts are bound by the contracts; f) contract execution: if there are no provisions governing good faith or equity that apply; g) difficulty in implementing contracts:
if there are difficulties, still refer to good faith;
and h) sanctions for parties who do not perform the contract and exclusion for the breach of contract (exceptio non adimpleti contractus).26
In addition to Hesselink’s opinion, the author also refers to the UCC in the United
States of America (USA), which applies the common law tradition to find out the meaning of good faith in relation to business/trade contracts. The author deliberately refers to the UCC because it is a relatively new commercial code that seeks to codify all types of trade and transaction laws in the USA, whose explanation of the meaning of good faith is far more adequate than those highlighted in the Roman legacy of civil code in civil law tradition countries.
Sections 2-103 (1) (b) of the UCC defines good faith as ‘honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade’. Honesty in fact refers to the “pure heart and empty head” test. This is known as a good faith purchase,27 a test of good faith in a subjective sense (state of mind),28 which requires the perpetrator to act honestly without malicious intent, deceit, and ulterior motives.29 This definition is in line with the opinion of the American Bar Association that good faith means honesty and supports the opinion of Judge Hough, who uses the word
“faith” as recognition of honour and moral.30 Meanwhile, commercial reasonableness refers to aspects of decency, fairness, and reasonableness in the implementation of a business/trade contract. This is called good
27 E. Allan Faransworth, “Good Faith Performance and Commercial Reasonableness under the Uniform Commercial Code”, The University of Chicago Law Review Vol. 30, No.4, (1968): 668.
28 Ibid.
29 Roger Brownsword, Norma J. Hird, and Geraint Howells (eds), Good Faith in Contract: Concept and Context, (England: Ashgate/Darthmouth, Aldershot (Hants), 1999), p. 122.
30 Ibid, p. 669.
31 Ibid, pp. 671-672.
32 Ibid, p. 672.
33 Bad faith is generally applied by an insurer in an insurance contract. To better understand this issue, see Thomas A. Diamond, “The Tort of Bad Faith Breach of Contract: When, if at All, Should it be Extended
faith performance. The question is whose morality, justice, and rationality are used? Of course, the morality, justice, and rationality used refer to the absurdity that applies in the trading community or society itself, not those based on the beliefs held by a particular person.
This is the test of good faith in an objective sense.31 Good faith performance also requires voluntary and conscious cooperation between the parties to ensure the implementation of the agreement and to obtain the desired benefits.32
The next issue is what is bad faith? There is also no standard definition related to the concept of bad faith. However, in the USA, for example, based on Section 1-203 of the UCC, it can be stated that every trade contract should be based on good faith and fair dealing.
Because a contract is guided by good faith and fair dealing, the substance of the contract should be good and benefit the related parties without any bad faith. Of course, as everywhere else, failing or not complying with a contract can terminate the contract and can be considered as breaking the promise or acting against the law. The deliberate action not to take or the act of neglecting or cancelling an obligation in a contract or the substance of a contract is a form of bad faith.33 Thus, it can simply be said that bad faith is all actions that go against the
principle of good faith.
To this point, it is clear that good faith in a contract law is a major doctrine that provides moral, honesty, honour, and loyalty principles and guidelines for the parties in entering into a trade/business contract. At the same time, good faith can also be measured by real standards in the implementation of a contract based on adherence to the agreed substance of the contract, cooperation between parties, and the concepts of justice, morality, and fairness of the trade/business community or society that are generally accepted. At the same time, in trade/business contracts, behaviour that is not based on good faith such as cheating, dishonesty, violating morality and justice, extortion, cunning, trickery, fraud, and exploitation of position and status (social, economic, and political) excessively for profit is a bad faith behaviour.
C. Good faith versus bad faith: A company law perspective
Good faith in the context of company law, both in civil law and common law systems, is more of a statutory obligation either as a result of a contract or as a result of an act.
beyond Insurance Transactions?”, Marquette Law Review Vol. 4, No. 3 (1981): 425; See also Alan O. Sykes,
“Bad Faith Breach of Contract by First-Party Insurers”, Journal of Legal Studies Vol. 25, No. 2, (1996): 405.
34 Sridhar Arcot, Valentina Bruno, and Antoine Faure-Grimaud, “Corporate Governance in the UK: Is the Comply or Explain Approach Working?”, International Review of Law and Economics Vol. 30, No. 2, (2010): 193;
Jean J. du Plessis, et al, German Corporate Governance in International and European Context (Switzerland:
Springer, 2017), pp. 8-9.
35 Carsten Garner-Beuerle, Phillip Paech, and Edmund Phillip Schuster, Study on Directors’ Duties and Liabilities, (London: London School of Economic Enterprise, 2013), pp. 4-5. http://eprints.lse.ac.uk/50438/1/__
Libfile_repository_Content_Gerner-Beuerle%2C%20C_Study%20on%20directors’%20duties%20and%20 liability%28lsero%29.pdf, accessed 17 April 2021.
36 Yafet Yosafet Wilben Rissy, “Doktrin Piercing the Corporate Veil: Ketentuan dan Penerapannya di Inggris, Australia dan Indonesia”, Jurnal Refleksi Hukum Vol. 1, No. 1, (2019), accessed 17 April 2021, doi: https://
doi.org/10.24246/jrh.2019.v4.i1.p1-20.
37 Yafet Yosefet Wilben Rissy, Corporate Governance: Kajian Teori, Konsep dan Praktek Terbaik Lintas Yurisdiksi, Perspektif International Serta Tantangannya, (Salatiga: Griya Media, 2020), pp. 307-312.
Good faith in the context of a company law is closely related to the duties of directors both in a one-tier board system applied such as in the UK, Canada, America, Australia, and New Zealand34 and in a two-tier board system applied such as in Indonesia, the Netherlands, and Germany. In this perspective,35 it is important to look at the doctrine regarding the duties of the directors. In general, there are two main duties of the directors, namely the duty of care and skill which is born from the common law womb and the duty of fiduciary or the duty of loyalty (the USA’s term for the duty of fiduciary), which is born as a result of contracts and/or acts.36
In this article, the author only focuses on the duty of fiduciary (loyalty) for in the duty of fiduciary, the doctrine of good faith is attached. In principle, the doctrine related to fiduciary duty is the duty to act in good faith and in the best interest of the company.
The question is what does the duty to act in good faith mean?37 In order to understand the meaning of the duty to act in good faith, there is no other way except to trace it in the latest existing company law which provides
more adequate insight into good faith. For this goal, the author deliberately chose the newest existing company law in Canada namely the 2019 Canadian Business Corporations Act (the 2019 CBCA); in the USA, namely the 2016 US Business Model Corporations Act (the 2016 Model Act); and in Indonesia, namely Law No. 40 of 2007 concerning Limited Liability Companies (the 2007 Company Law) to be further examined.
In Canada, the doctrine of good faith is adopted in section 122 (1) (a) of the 2019 CBCA as follows: ‘every director and officer of a corporation in exercising their powers and discharging their duties shall (a) act honestly and in good faith with a view to the best interests of the corporation’. Canada, in the recent amendments to its Company Law, has taken a step forward by changing the classical formulation of fiduciary duties, that is ‘the director’s duty to act in good faith and in the best interest of the company’ to ‘the director’s task to carry out his powers and duties honestly and in good faith in the best interests of the company’. It is interesting to note that the word ‘honestly’ is attached before the word ‘good faith’. Hence, acting honestly is the quality that represents good faith. In contrast, acting in good faith is the quality that represents honesty. Both acting honestly and in good faith constitute a moral entity that cannot be separated.
The understanding of the concept of
38 Re Standard Trustco Ltd, 15 OSCB 4322 (1992), in Ponsford, M.P., “Corporate Governance and the Business Judgment Rule: Fiduciary Duties of Directors in Canada and the People’s Republic of China”, Journal of Civil & Legal Sciences Vol.5. No. 1, (2015): 2.
the duty of honesty and good faith above in Canada was inspired by the case of BCE Inc. vs. Debenture holders, in 1976, where the Court interpreted the fiduciary duty as something easy to understand and a prohibition to cheating acts.38 Thus, in Canada, good faith means to act honestly and not act fraudulently.
If the meaning of good faith in the common law tradition and the meaning of good faith in the Canadian Company Law are combined, then good faith is more about a moral quality that contains honesty and is not fraudulent.
Furthermore, in the USA, in the latest amendment to its company law in 2016 known as the 2016 Model Act, the doctrine of good faith was adopted and further given a deep explanation of it. Section 8.31 (a) of the US 2016 Model Act defines the complete duties of a fiduciary or director’s loyalty as follows:
Each member of the board of directors, when discharging the duties of a director, shall act: (i) in good faith and (ii) in a manner the director reasonably believes to be in the best interests of the corporation.
In the explanation of section 8.31 (a) of the 2016 US Model Act, it is stated that this provision is a director’s standard of behaviour and contains a concept that has been used by the court in defining the duty of loyalty of directors. In the context of good faith, the phrase “reasonably believes” has both subjective and objective characteristics. In a subjective sense, the phrase “reasonably
believes” is associated with the director’s duty to act in good faith where it is actually believed that the action is not the result of an objective analysis that can lead other directors to take the same action when they are in a similar situation.39
How can one assess directors’ liabilities on actions they take based on the phrase
‘reasonably believes’ in the USA? It can be said that in an action, if the director has real subjective beliefs and as long as these subjective beliefs are honest and those beliefs are in good faith, the director has wide discretion in making decisions.40 For this reason, a director’s decision can be understood as ‘reasonably believes’. Meanwhile, regarding the objective understanding of the phrase ‘reasonably believes’, it is explained that although the director has wide discretion in gathering information and drawing conclusions, regardless of whether the director’s beliefs are reasonable and based on his knowledge and experience, the action must involve an objective review.41
Thus, the measure to ensure that a director’s action is not reasonable, and therefore can be held accountable before the law, is when the action falls outside the allowable limits in a healthy discretion as a result of the director’s actions not being carried out through adequate preparation to gain the necessary information.42
The next issue is how to assess the
39 The explanation of s 8.31 (a) the 2016 US Model Act.
40 The explanation of s 8.31 (a) (2) (ii) the 2016 US Model Act.
41 The explanation of s 8.31 (a) the 2016 US Model Act.
42 The explanation of s 8.31 (a) (2) (ii) the 2016 US Model Act.
43 The explanation of s 8.31 (a) the 2016 US Model Act.
violation of good faith. In the USA, when an action does not have sufficient reason or exceeds the limits of a reasonable judgment, then that action contains bad faith. Actions motivated by bad faith can be categorized as “reckless indifference” or “deliberate disregard” or “wilful neglect”. This type of action has sufficiently led to the conclusion that there has been an act of bad faith and there has been an act that has not served the best interests of the company.43
Eventually, the doctrine of good faith in Indonesia was examined. The doctrine of good faith in Indonesia was also adopted in the 2007 Company Law. In general, according to Article 1 (5) and Article 92 (1) (2) of the 2007 Company Law, it is stipulated that the director’s fiduciary duty is to administer or to manage the company to achieve the company’s goals. The formulation regarding the director’s fiduciary duties in the 2007 Company Law as stipulated in the above articles is that in managing a company a director is to be fully responsible for the management of the company for the benefit of the company in accordance with the aims and objectives of the company, to run the management of the company for the benefit of the company and in accordance with the aims and objectives of the company, and in running the management of the company, every member of the Board of Directors should act in good faith and
responsibly.
The director’s fiduciary duty to act in good faith and in the best interest of the company is reaffirmed in the regulations regarding the responsibility of the director in the case of corporate loss or bankruptcy. According to Article 97 (5) and Article 104 (4) letter (b) of the Company PT Law of 2007, a director cannot be held accountable if he/she has run the management in good faith and prudently for the best interest of the company and in accordance with the aims and objectives of the company.
From the above explanation, the author argues that the doctrine of good faith attached to the director’s fiduciary duties contains a number of qualities that need to be considered.
These qualities are that in performing his/her duties, a director should act honestly, fairly, reasonably, and based on sufficient data with devoted attention. Furthermore, when taking a wider discretion, it should be justified legally and morally and be according to adequate preparation and information/data. A director should also avoid a conflict of interest, serve the objectives of the company, and comply with the prevailing laws and regulations. If directors perform their actions according to the above qualities, then they are protected by the corporate veil.44
44 The opposite of the corporate veil is piercing the corporate veil. To understand piercing the corporate veil, see Helen Anderson, “Piercing the Veil on Corporate Groups in Australia: The Case for Reform”, Melbourne University Law Review, Vol. 33. No. 2, (2009): 333; Milton Bordwin, “Piercing the Corporate Veil”, Management Review Vol.84, No. 8, (1995): 37; Larry S. Bryant, ‘Piercing the Corporate Veil’, Commercial Law Journal Vol. 87, No. 6, (1992): 299; Robert B. Thompson, “Piercing the Corporate Veil: An Empirical Study”, Cornell Law Review Vol. 76 (1991):1036; Jason Harris and Anil Hargovan, “Cutting the Gordian Knot of Corporate Law”, Australian Journal of Corporate Law Vol. 26, No.1, (2011): 39.
45 Yafet Yosafet Wilben Rissy, “Ketentuan dan Pelaksanaan Business Judgement Rule di Amerika, Australia dan Indonesia”, Jurnal Masalah-Masalah Hukum Vol.89. No.2, (2020): 61, accessed 17 April 2021, doi: 10.14710/
Conversely, the author also considers that a director has acted in bad faith if she/
he commits deliberate disregard, does reckless indifference, takes advantage of himself/herself or his/her family or affiliates, performs actions that do not make any sense (unreasonable), and takes actions beyond common sense. Moreover, a director acts in bad faith if he/she acts fraudulently or unfairly, takes a wider discretion without limits and arbitrarily that is against the law and morals, and deploys discretion without adequate preparation and data. A director is also considered to act in bad faith if she/
he serves the interests of her/his personal, family members’, or affiliates’ interests or has a conflict of interest and intentionally violates the provisions of the applicable laws. If a director does her/his duties in the corridor of the above qualities then she/he is not protected by the corporate veil or the corporate veil can be lifted/removed (piercing the corporate veil).45
D. Points of contacts between good faith versus bad faith and legal liability in mitigating the COVID-19 pandemic
Before describing the points of contact between the principles in good faith and bad
faith within the context of the COVID19 pandemic mitigation, it is important to first explain the legal liability concept. In a simple way, legal liability can be understood as the legal responsibility that is given by someone or requested from someone for violating the laws, including civil, criminal, and administrative laws. In civil law, legal liability is perceived as the legal responsibility to provide payment or compensation for the damage caused to a third party for the violation of civil law, infraction of tort law, and/or a breach of a contract.
Mashaw emphasized that ‘at its most general level, the law governing civil liability imposes an obligation to repair any negligent or intentional harm inflicted upon another’.46 In civil law and in the context of the COVID-19 pandemic mitigation in Indonesia, a public officer can be sued for breaching a tort law and for doing nothing as one is supposed to do based on Article 1365 of the Indonesian Civil Code or other class action petitions allowed by the applicable laws and regulations.
In criminal law, as explained by Hart, legal liability can be demanded from a person
mmh.49.2.2020.160-171. See also Thomas G. Heintzman, Q.C. and Brandon Kain, “Through the Looking Glass: Recent Developments in Piercing the Corporate Veil”, Banking & Finance Law Review Vol. 28. No. 3, (2013): 525; Stacey Hunt, “Piercing the Corporate Veil”, Paralegal Today Vol. 13, No. 2, (1995): 68; Sandra K. Miller, “Piercing the Corporate Veil Among Affiliated Companies in the European Community and in the U.S.: A Comparative Analysis of U.S., German, and U.K. Veil-Piercing Approaches”, American Business Law Journal Vol. 36, (1998): 73; Ian M. Ramsey and David B Noakes, “Piercing the Corporate Veil in Australia”, Company and Securities Law Journal Vol. 19, No.4, (2001): 250; Robert B. Thompson, “Piercing the Corporate Veil: An Empirical Study”, Cornell Law Review Vol. 76, (1991): 1036.
46 Jerry L. Mashaw, “Civil Liability of Government Officers: Property Rights and Official Accountability”, Law and Contemporary Problems, Vol. 42. No.1, (1978): 8.
47 H. L. A. Hart, Legal Responsibility and Excuses: Punishment and the Elimination of Responsibility, in Punishment and Responsibility (Oxford: Clarendon Press, 1968), pp. 181-183.
48 H. L. A. Hart, Negligence, Mens Rea, and Criminal Responsibility in Punishment and Responsibility (Oxford:
Clarendon Press, 1968), p. 136.
49 Edward G. Jennings, “Tort Liability of Administrative Officers”, Minnesota Law Review (1978): 263.
who has committed a crime if he has the capacity and sufficient opportunity to obey the law but chooses to deliberately violate it,47 including negligence.48 In criminal law and in the context of the COVID-19 pandemic mitigation in Indonesia, a public officer can be held accountable for committing an abuse of power and corruption as stipulated by Articles 2, 5, and 8 of Law No. 20 of 2001 concerning the Amendment of Law No. 31 of 1999 concerning the Eradication of Corruption.
Meanwhile, in administrative law, as illuminated by Jennings, in terms of administrative liability, a public officer can be held accountable before the court if he/she commits an error in conducting his/her public duties causing injury or damage to private personal or property rights.49 In criminal law and in the context of the COVID-19 pandemic mitigation in Indonesia, a public officer can be sued for issuing any decisions that cause any damage for personal and public interests based on Article 53 (2) of Law No. 5 of 1986 concerning the Administrative Court.
There are various issues in the context
of COVID-19 mitigation, especially related to the extraordinary authority guaranteed in Article 17 (1) (2) (3) of the 2020 COVID-19 Law. As indicated, these extraordinary powers are given without clear guidelines to exercise the powers. This has led to a kind of blanket guarantee that is very dangerous because it has the potential to cause massive corruption that not only can bankrupt the national economy but also can bankrupt the national legal system. A general and normative guideline is provided based on Article 27 (2) of the 2020 COVID-19 Law, which states that the use of the extraordinary authorities must be carried out in good faith and in accordance with the provisions of the applicable laws and regulations.
In this context, it is expected that the explanation regarding good faith versus bad faith, both in terms of its meaning, from the contract law and from the company law, especially the duties of the director, will help to understand the concept of good faith regarding the use of extraordinary powers guaranteed by the 2020 COVID-19 Law.
The main principle that needs to be upheld is that the government officials have been guaranteed several extraordinary powers which can be deployed to mitigate the economic negative impacts of the COVID-19 pandemic to the government budget as well as to financial sector stability. However, the policies, decisions, and actions must be reinforced with good faith. How can this be done? If it is based on the good faith doctrine
in its subjective meaning, then the government officials need to have in their minds the qualities of honesty, respect, loyalty, and trust.
If it is based on good faith in its meaning as an open norm, the government officials need to be flexible as well as autonomous in their actions and decisions. Flexible means that they have enough leeway to interpret and implement the applicable laws, discretions, and policies within moral and legal boundaries.
Autonomous means that in exercising their authority, the government officials are not influenced by bad faith from either themselves or their families and outside parties except in serving justice and truth themselves.
Meanwhile, if it is based on good faith in its objective meaning, then every government official needs to provide protection for the public interest and idealized expectations, make fair contracts, and not act fraudulently.
Thus, when actions do not abide by all the above qualities by the government officials, it means they have acted in bad faith or the concept of good faith as an ‘excluder’ applies.
To this point, it is obvious that there are several legal liability boundaries that should be obeyed by the government officers.
Furthermore, if it is based on the application of good faith in a contract law, the government officials need to have moral qualities such as honesty, honour, and loyalty (a good faith state of mind/ subjectivity) in doing their actions and making decisions.
The government officials also need to design, issue, and implement every decision, law, and
discretion which aims at serving the substantive justice, morals, as well as the prosperity of all Indonesians (good faith performance).
Contrary to that, any behaviour of the state officials that departs from these qualities such as fraud, dishonesty, and moral abuse which violates the substance of substantive justice, extortion, cunning, trickery, and exploitation of position and status (social, economic, and political) excessively for personal or group profit can be considered as having acted in bad faith. Hence, if the government officers do so when mitigating the COVID-19 pandemic, they must be held accountable before the court.
With respect to the application of good faith in the fiduciary duties of the director, it is obvious that the government officials are just like a company’s directors. They are appointed and dismissed by the people (as shareholders) who in carrying out their fiduciary duties need to act honestly and fairly. Their actions should be based on sufficient information and reasonableness. They should also devote attention when deploying a wider discretion which should be justified legally and morally as well as should rely on adequate preparation and information/data. They should not have a conflict of interest as well and comply with the prevailing laws and regulations.
Conversely, the actions of the government officials can be constituted as being in bad faith if they exercise their extraordinary powers with deliberate disregard and reckless indifference, take advantage of others or their family members and affiliates, make decisions
that are beyond common sense (unreasonable), act fraudulently or unfairly, deploy discretion without limits and arbitrarily which are against the law and morals, use discretion without adequate preparation and data, and have a conflict of interest and intentionally violate the provisions of the applicable laws.
Again, these qualities are simply categorized as bad faith. The government officials who commit such a bad faith when mitigating the COVID-19 pandemic can be sued criminally, civilly, and administratively.
Conclusion
The COVID-19 pandemic has caused real economic, social, and health crises, so they need to be carefully mitigated by the government.
For this reason, the government officials have been attributed some extraordinary powers in the 2020 COVID-19 Emergency Law, whose use is limited by good faith and the provisions of the applicable laws and regulations.
Unfortunately, due to a lack of clarity of the elaboration of the concept and application of the good faith principle, the potential for abuse of authority and corruption is wide open when the extraordinary powers are not accompanied by the adequate principles of good faith and in accordance with the prevailing laws and regulations. Furthermore, under a contract law perspective, good faith should be deployed in terms of commercial reasonableness refers to aspects of decency, fairness, and reasonableness in the implementation of a business/trade contract. Any actions that
violate these characters should be considered bad faith. Meanwhile, under corporate law perspective, the doctrine of good faith is attached to the director’s fiduciary duties that consist of several qualities such as to act honestly, fairly, reasonably, and based on sufficient data with devoted attention. Any decisions that are not based on these qualities are bad faith.
Furthermore, to avoid abuse of the extraordinary powers that have the potential to corrupt the national economy, finances, and the rule of law itself, every government official should devote their services to comply with the qualities of good faith such as justice, truth, loyalty, and honesty, while serving the goals of the State and society. These are
the point of contacts that should be taken into account seriously by the government officials. It is unacceptable, both morally and legally, even more so during this pandemic, if the government officials utilize their public positions and authority to commit fraudulent, corruptive, and manipulative acts. Actions that are contrary to good faith are actually bad faith and they are simply against the law. For this reason, they must be held accountable before the court. By avoiding any bad faith actions, the government officials will contribute significantly to the effort to mitigate the negative impacts of the pandemic. Otherwise, they can be held accountable before the courts:
civilly, criminally, and administratively.
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