Member Article

On 30 January 2020, the World Health Organisation (WHO) declared the outbreak of the new coronavirus, (subsequently renamed as COVID-19), “a public health emergency of international concern”. Various unprecedented and draconian measures were imposed by the PRC Government and other governments around the world, namely, a city lockdown, travel restrictions and bans, extension of the Lunar New Year holidays, mandatory quarantine orders, border closures, etc. Inevitably, given Hong Kong’s interconnectedness with China, Hong Kong businesses will be commercially impacted.

Under Hong Kong statute, force majeure (which normally refers to a specified event or events beyond the parties’ control, where one or both parties would be entitled to (i) cancel the contract; (ii) be excused from the performance of the contract; (iii) suspend performance of the contract; (iv) claim an extension of time for performance of the contract) will only apply if the parties included a force majeure clause in their contract. Further, the clause itself is subject to the usual common law principles and rules of contractual construction and interpretation.

If absent an express contract provision, a party to a contract may need to rely on the common law doctrine of frustration, which is generally very narrow in scope. This article aims to explore the two concepts and provide some key take-away points for clients.

Force Majeure

In Hong Kong, commercial contracts often include a force majeure clause setting out the consequences if an unforeseen event occurs. A force majeure clause will help allocate risk when an unforeseen event adversely affects the ability of one or both parties to perform their contractual obligations on time or at all.

Generally, force majeure clauses come in different forms, but typically, they have the following features:

1. Defining of certain events as a force majeure event or events beyond the reasonable control of a party, including specifying a non-exhaustive list of examples of events covered by the clause;
   
   
2. Provides for a party to be excused from performance of its contractual obligations where such event is triggered;
   
   
3. Requiring a defaulting party to give notice to the other party in a prescribed form and within a specific timeframe when a force majeure event has occurred;
   
   
4. Provides the consequences of the occurrence of a force majeure event, such as suspension for performance of obligations or extension of time for performance of obligations.
   
   

Does COVID-19 qualify as a force majeure event?

Whether circumstances arising out of the COVID-19 outbreak will qualify as a force majeure event ultimately depends on the construction of the clause. The party invoking the clause will generally have to prove that:

(a) The event is covered by the force majeure clause as drafted – some clauses make it reasonably clear if they specifically identify “disease”, “epidemic” or “quarantine” as force majeure events, whilst other clauses may include more general events such as “Acts of God” or “circumstances beyond the parties’ control”;

(b) The defaulting party has been prevented, hindered or delayed from performing the contract by reason of that event;

(c) The defaulting party’s non-performance was due to circumstances beyond its reasonable control; and

(d) There were no reasonable steps that the defaulting party could have taken to avoid or mitigate the event or its consequences.

Frustration

Where a contract does not provide for a force majeure clause, the common law doctrine of frustration could become relevant. This doctrine operates to discharge a contract where there is an occurrence (or in some cases, a non-occurrence) of some event beyond the control of the parties, for example, where performance of the contract became physically or legally impossible or too radically different from the original purpose of the contract. It is essential that the frustrating circumstances must arise without fault of any of the contracting parties.

The test for frustration requires an event which significantly alters the contractual rights/obligations from what the parties reasonably envisaged when the contract was entered into so that it would be unjust to hold the parties to their initial contractual obligations in the new changed circumstances.

The doctrine however, is very limited in scope: (1) a contract will not be frustrated if it has a force majeure clause; (2) mere inconvenience to perform the contract or the fact that a contract has become more onerous to perform will not suffice to frustrate a contract to excuse non-performance; (3) if the impossibility of performance is the fault of either of the parties.

Hong Kong case law is clear that frustration may not be invoked merely to get out of a bad commercial bargain or if the parties have foreseen the relevant event. Examples of frustrating events include: (1) the physical destruction of the subject matter of the contract; (2) cancellation of an expected event; (3) delay; (4) legal changes; (5) death or incapacity of a party.

Notably, demonstrating the difficulty in relying on the doctrine of frustration, in Li Ching Wing v. Xuan Yi Xiong [2004] 1 HKLRD 754, a case which concerned the SARS epidemic, the court rejected the tenant defendant’s attempt to rely on frustration to discharge a 24-month lease which he was 13 months into. The tenant defendant was subjected to a 10-day isolation order due to SARS in 2003. The court rejected the tenant defendant’s case on the ground that the isolation order was only for a short period of time in the context of the entire lease.

What should you do?

1. Clients should review and revisit their existing contracts to see if they contain a force majeure clause and, if they do, check whether their wording is sufficient to cover the outbreak of COVID-19, whether any notification requirements and timelines for reporting the event are to be complied with upon invoking the clause, and to check the consequences of the force majeure event;
   
   
2. Advice should be sought on the scope and effect of the force majeure clause, if there is one or, if there isn’t one whether going forward new contracts should include one.