Disclaimer: The views expressed are that of the individual author. All rights are reserved to the original authors of the materials consulted, which are identified in the footnotes below.
By Oscar Wong
Introduction
As COVID-19 runs rampant, the world experiences an unprecedented disruption in public life and business. Offices shut, malls emptied and even the Olympics were cancelled. I remember reading on the news that the world’s top fine jewellery event, the Jewellery & Gem WORLD Hong Kong, had to be postponed for the first time in four decades due to low expected turnout rates (buyers local and foreign) amidst the recession--and organisers refused to refund jewellers who had paid to exhibit their products in the fair. This made me wonder, how were the organisers let off for suspending performance of their expensive contracts? A quick glance of my commercial law notes reminded me of contractual frustration and force majeure clauses, which could both shield parties from liability for failing to fulfill their contractual obligations. But does a force majeure clause apply to the COVID-19 pandemic, which nobody saw coming? If so, what are the requirements for invoking a force majeure clause? This Article explores these questions in turn.
What is force majeure?
Force majeure is the brainchild of French law.[1] English common law provides no definition of force majeure. So far as the UK and Hong Kong are concerned, force majeure generally refers to certain unforeseen acts, events or circumstances beyond the control of one (or both) parties which prevents the parties from fulfilling their contractual obligations. When force majeure acts, events or circumstances occur, a force majeure clause may be invoked to absolve one or more parties of non-performance of their contractual obligations. A force majeure clause may also provide for the extension of time or termination of contract in the event of continued delay or non-performance.
Does a force majeure clause apply to the COVID-19 pandemic?
To answer this question, we must first understand how force majeure clauses operate in Hong Kong. With a common law legal system inherited from 150 years of British governance, there are no recognized force majeure acts, events or circumstances in Hong Kong law. In the case of Sun Wah Oil & Cereals Ltd. v Gee Tai Trading,[2] the Court refused to give effect to a provision reading “force majeure: standard terms” on the ground that force majeure is per se a meaningless label. Accordingly, contracting parties must expressly provide for the force majeure acts, events, or circumstances that would trigger the operation of a force majeure clause in the terms of contract.
Coming back to our question, the COVID-19 pandemic will only invoke a force majeure clause if the pandemic is covered by the clause. Wording such as “pandemic”, “epidemic” or “disease” within the list of events that trigger force majeure will certainly cover the COVID-19 pandemic. Alternatively, a comprehensive phrase such as “all events outside the reasonable control of the parties'' will also be applicable to the pandemic, because the outbreak of the pandemic are unquestionably beyond anyone's control. However, things are not always cut-and-dry. Consider the oft-used phrase “act of god”, which refers to extraordinary events that stem from the workings of “elementary forces of nature unconnected with the agency of man or other cause”.[3] Applying this definition to the COVID-19 pandemic, the problem becomes apparent: the COVID-19 pandemic is both unconnected and connected to human agency. On one hand, the emergence of the virus is likely unconnected with human agency.[4] On the other hand, the spread of the virus and the consequent regulatory measures which have affected business activities result from human activities and decisions . The crux of the problem appears to be the ambiguity of determining the applicability of ‘act of god’ in terms of connection to human agency. To avoid uncertainty and confusion, in practice, force majeure clauses are often drafted in a way that attempts to cover all possible unforeseeable events. This way of drafting entails both the listing of specific circumstances and an all-encompassing catch-all phrase.
An example of a catch-all phrase:
‘Neither party hereto shall be liable except under the indemnities provided herein and for the payment of monies due hereunder for failure to perform the terms of the Agreement when performance is hindered or prevented by strikes (except contractor induced strikes by contractor's personnel) or lockout, riot, war (declared or undeclared), act of God, insurrection, civil disturbances, fire, interference by any Government Authority or other cause beyond the reasonable control of such party’[5]
What are the other requirements for invoking a force majeure clause?
In order to invoke a force majeure clause, there must be a causal link between the event relied on and the invoking party’s non-performance. As an example, mere increased economic cost of contractual performance, unless otherwise provided for in the contract, is insufficient to invoke a force majeure clause because costliness does not impact a party’s ability to perform his obligations .[6] Again, the requisite form of causal link is determined by the wording of the clause. The contract may stipulate, for example, that the force majeure event has ‘prevented’ performance, or ‘rendered unable’ a party to carry out its obligations. Other wording may include ‘hindered’ or ‘delayed’. Unsurprisingly, ‘hindered’ or ‘delayed’ sets a less stringent standard than ‘prevented’.
This was demonstrated in the Court of Final Appeal decision of Goldlion Properties Ltd v Regent National Enterprises.[7] In the case, the contract concerned provided that the force majeure clause could be invoked
“should the vendor become unable or fail to complete the sale and purchase of the property on the completion date due to any matter (including and without limitation to third party action) beyond the reasonable control of the vendor and which in the reasonable opinion of the vendor materially hinders, prevents or obstructs the completion of the sale and purchase of the Property”
The Court held that the word hinders sets a substantially lower threshold than the words ‘obstructs’ and ‘prevents’ such that force majeure may otherwise be invoked where performance is not rendered impossible. The majority defined ‘hinders’ as ‘renders more difficult in an appreciable or significant way’.[8]
One notable point on the decision is the Court’s conception of ‘matters’ that may hinder contract performance. The Court held that such ‘matters’ may include the risk of events happening after contract completion.[9] In the case, the vendor of property invoked the above force majeure clause on the basis that the risk of failure to convey the legal title (because he may not have authority to enter into the contract) ‘hinders’ the sale and purchase of the property. The Court accepted its argument, asserting that such a risk creates uncertainty which would likely pose significant commercial problems that make contractual performance more difficult.[10] This reasoning is welcomed, because it is logical for recognising the actual effects that mere risks may inflict in the business context. Frankly, it is arbitrary to distinguish between events that happen before and those that may happen after contract completion (as the purchaser argued) because the chronological order of events has no discernable link with the events’ impact on contractual performance. However, it is unclear whether risks will be considered in any clause which does not provide for ‘matters’, but more specifically for ‘circumstances’. Whether risks of events that may happen after (or before) contract completion qualifies as ‘circumstances’ is a question for the courts to rationalise.
Additionally, to invoke force majeure, there may be a duty to mitigate. If a duty of mitigation is expressly provided in the clause, the non-performing party will be required to prove that it has discharged its duty to avoid as far as possible the adverse consequences of the force majeure event and minimise the losses it causes. In fact, Such a duty is often implicit in the phrase ‘beyond the reasonable control’. The rationale is as follows: A matter will not be beyond reasonable control if the party invoking force majeure can take reasonable steps to forestall or neutralise it. To prove that a matter is beyond reasonable control, an attempt to mitigate the impact of the event constitutes good evidence.
Conclusion
A force majeure clause is treated just like any other contractual term. The applicability of a force majeure clause to the COVID-19 pandemic depends on its wording, which provides for the ambit of the clause as well as the requisite causal link between the force majeure event and non-performance. As with all contractual terms, the party with stronger bargaining power inevitably wields more influence over the wording of the force majeure clause. To maximise one’s own protection in a contract, the most prudent course of action is to seek expert legal advice on the drafting of force majeure clauses.
[1] Article 1218 of the French Civil Code [2] [1993] HKC 132 [3] Chitty on Contracts (33rd edn, Sweet & Maxwell 2020),§36-019 [4] BBC, ‘Covid: WHO says 'extremely unlikely' virus leaked from lab in China’ <https://www.bbc.co.uk/news/world-asia-china-55996728> accessed 18 February 2021 [5] Sonat Offshore SA v. Amerada Hess [1998] 1 Lloyds Rep 145 [6]Thames Valley Power Ltd v. Total Gas & Power Ltd [2006] 1 Lloyd’s Rep. 441; Tandrin Aviation Holdings Ltd v. Aero Toy Store LLC [2010] EWHC 40 (Comm) [7] [2009] 12 HKCFAR 512 [8] Ibid at [83] [9] Ibid at [86] [10]Ibid
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