How the pandemic affects contractual relationships – Force majeure clause and frustration

01/04/2021

As the Covid-19 pandemic continues and various social distancing rules have been implemented, daily business operations and events may be disrupted.  It is important to know how contractual relationships could be affected in these circumstances.

Force majeure clause

Force majeure clause is usually incorporated in a contract to enable the parties to excuse themselves from performing their obligations if specific events which are beyond the control of the parties occur.  Such events may include pandemic, government measures, acts of god, etc.

If you wish to rely on a force majeure clause to discharge your obligations under a contract, you should take note of the following:-

1. The clause needs to be expressly stated in the contract.

2. The force majeure event(s) stated in the clause must apply to your situation (sometimes the clause may just refer to “events which are beyond the parties’ control”).

3. You have to establish that the event has prevented or hindered you from fulfilling the contractual obligations. In other words, there has to be causal link between the force majeure event(s) and the performance of the contract.

4. You should check if there is any notification requirement in the clause, for instance, the period within which you should serve notices on other parties, the method of service, etc.

5. You should also check if there is a duty to mitigate the losses or damages arising from the event.

Frustration

If there is no force majeure clause in the contract, you may consider relying on the common law doctrine of frustration.  Frustration applies when circumstances arise which render the performance of the contract impossible or radically different from what is expected by the parties.  However, the threshold for establishing frustration is high and the court does not easily discharge the parties from performing the contractual obligations merely on the basis that the performance has become more difficult or expensive.

In a recent judgment of by Deputy High Court Judge To in The Center (76) Limited v Victory Serviced Office (HK) Limited (HCA 1020 of 2020), the Court found that although both the pandemic and the social disruption may be unforeseen at the time of executing the Tenancy Agreement and have rendered business operation more onerous and not profitable, none of the events has fundamentally or radically changed the nature of the parties’ obligations, or rendered the obligations to pay rent and observe the terms of the Tenancy Agreement physically or commercially impossible.  As such, frustration is not established.

In March 2021, the Consumer Council discovered that as a result of the pandemic, some wedding service providers have included stringent terms in their contracts which might prejudice the interests of customers.  For instance, in one of the contracts, it was stated that if the services to be provided were affected by unforeseeable events, the company reserves the right to determine whether to provide such services to the customer. Furthermore, the company will not make a refund and the customer cannot seek any compensation.

Given the uncertainties caused by the pandemic, it would be prudent to consider the possible impact of the pandemic when entering into a contract and provide for necessary contingency arrangements, for example, whether and under what circumstances performance of the contract can be postponed or cancelled; and the consequences in the event of postponement or cancellation.  This can help avoid potential future disputes.

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Written by: Henry Ma, Partner