Covid-19 and the question of Force Majeure

The global economy has taken a battering amid the coronavirus pandemic with many enterprises, no matter their size, struggling to fulfil contractual obligations. Boase Cohen & Collins Partner Susan Cheung examines some options which Hong Kong business owners may consider.

Hong Kong, 6 April 2020: With an unprecedented number of governments ordering border lockdowns, closures of non-essential businesses and restricting the movements of their citizens in a scramble to control the spread of Covid-19, business operations across all sectors large or small have experienced major disruptions.

The fallout from the coronavirus has had a huge impact on businesses and, more specifically, their ability to meet ongoing contractual obligations. Here is a brief look at the options which may be available to Hong Kong businesses.

Force Majeure Clause

A Force Majeure event is referred to as exceptional events beyond the parties’ control or circumstances that prevent or hinder the performance of an obligation and the occurrence of which entitles one or both parties to cancel the agreement, be excused from performance of it, or suspend or extend the time for performance.

A contract may or may not contain a Force Majeure clause. In Hong Kong, companies seeking to rely on a Force Majeure event can only do so if a Force Majeure clause has been expressly written into the contract. The clause must be written clearly and precisely and will usually comprise three major components:-

1. A list of specific Force Majeure events which triggers the operation of the clause such as “war, acts of God, acts of government, epidemics, diseases”;
2. The reporting obligations of the party seeking to invoke and rely on the clause, such as period for reporting and by what method; and
3. The consequences of the occurrence of the Force Majeure event, such as suspension or extension of time to perform.

The Hong Kong courts will, as far as possible, adopt a narrow approach to the interpretation of Force Majeure clauses according to their specific express wording, respecting the freedom of parties to contract on terms as they see fit, so clear and concise wording is essential.

Would the current Covid-19 pandemic be deemed a Force Majeure event entitling companies to relief from fulfilling their contractual obligations? Where an express term such as diseases, epidemics or pandemics has been used then Covid-19 is likely to be covered. Companies may also be able to rely on express wordings such as “acts of government” where governments have made orders/directives concerning closure of businesses, restriction of movement of citizens and stay-at-home orders. However, government advice or recommendations are unlikely to be covered.

Notwithstanding the event of Covid-19, the party seeking to invoke the Force Majeure clause must show it was the event which prevented them from performing the contract or rendered it impossible to perform, it was unforeseeable and there are no alternative means to perform the contract. Care should also be taken to check the notification requirements in the clause as a failure to give proper or timely notice may mean being barred from relying on the clause.

Doctrine of Frustration

In the absence of a Force Majeure clause, parties may be able to rely on the common law doctrine of frustration. Frustration occurs when (i) without the fault of either party (ii) a contractual obligation has become incapable of being performed (iii) because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract.

A party is not excused from performing the contract if, due to some unforeseen event, it has become more difficult, onerous or expensive than originally expected to perform. For example, a builder cannot refuse to perform a contract because extra money is needed due to an unexpected rise in the cost of building materials. The effect of frustration is to bring a valid contract to an abrupt end and both parties are immediately released from further performance from the time of the frustrating event.

Here are some practical steps for business owners to take:-

1. Review your contracts and identify any Force Majeure clause;
2. Consider the express wording of the clause, the contract as a whole and the circumstances that have arisen and determine if performance is excused by the clause;
3. Explore alternative ways of performing the contract;
4. Promptly serve any notices to the other party as required under the clause;
5. Keep good record of all events surrounding the Force Majeure event, your notice and attempts to find alternative ways to perform;
6. Consider your insurance policy to see what you are covered for under your contract;
7. Ensure all future contracts have a Force Majeure clause and carefully consider all wordings to cover every eventuality.

If in doubt, it is wise to obtain professional legal advice so that you fully understand your rights, accountability and potential risk. A well-drafted contract should cover the parties’ business and legal obligations, protect your interests and limit your liability.

Susan Cheung has been a Partner in Boase Cohen & Collins since 2016. Her key areas of practice include intellectual property (trademarks, designs, patents and copyright), civil and commercial litigation, information technology and trade secrets. She can be contacted at susan@boasecohencollins.com.

The coronavirus pandemic has left many businesses struggling to fulfil contracts.