The unfolding coronavirus has devastated the Hong Kong economy. In one of the world’s most expensive commercial property markets, it is not surprising that the possibility of invoking force majeure clauses has grabbed the attention of many business amidst an environment of difficulties and uncertainties.
What Is a Force Majeure Clause?
It is common for commercial contracts to include a force majeure clause to deal with certain events (usually out of the control of the parties) that may significantly disrupt the parties’ ability to perform their contractual obligations. In the case of such unforeseen events, the party may rely on the force majeure clause to excuse itself from performing the contract.
Who Can Rely on the Force Majeure Clause?
In order to rely on a force majeure clause, the party seeking to rely must satisfy the following requirements:
- First of all, the party must ensure that there is a force majeure clause in the contract. Without an express clause, parties cannot imply a force majeure clause into the contract. However, some contracts may incorporate a force majeure clause without the term “force majeure”. To identify whether there is an equivalent clause, the party may look for the following characteristics:
a. Definition of triggering events, such as “events beyond the reasonable control of a party”, together with a non-exhaustive list of events which fall into such definition, eg war, Acts of God;
b. Formalities that the party must follow after a triggering event occurs; and
c. The consequences of the triggering event occurring; usual consequences include an extension of time or full/partial discharge of the contractual obligation.
Parties wishing to rely on a force majeure clause must ascertain the scope of the clause and show that the current event falls within the definition of force majeure events.
The party must show that the force majeure event is beyond its control and that it has unforeseeably prevented or delayed its performance of the contractual obligation. A causal link between the force majeure event and the party’s failure to perform the contract is essential.
The party must demonstrate that it has taken all reasonable steps to mitigate the impact of the force majeure event.
The party must show that it has complied with the relevant notice formalities stated in the force majeure clause. As there is usually a time limit for notice to be given, parties are strongly advised to proceed in a timely manner.
While the impact of the coronavirus outbreak is certainly unforeseeable and significant, whether such event constitutes a force majeure event still depends on construction of the clause. Tenants should always review it with prudence. Legal assistance should be sought, where necessary, to ensure the parties’ interests are protected.
The major hurdle appears to lie in the third requirement above. Tenants’ primary contractual obligation under the tenancy agreements would be to pay rent in accordance with the terms. It is an established principle that the force majeure clause does not release a party from a contract simply because it becomes difficult for a party to perform its obligations after signing. Therefore, in the absence of extreme incidents (eg government-ordered shutdown of the premises for quarantine purpose for a significant period of time), it is unlikely that tenants can invoke the force majeure clause to excuse themselves from performing the tenancy agreement.
The Common Law Principle of Frustration as an Alternative?
If it is not possible to rely on the force majeure clause, the frustration doctrine under common law may provide some relief for tenants. Pursuant to this doctrine, a contract may be discharged “when something occurs after the formation of the contract which renders it physically or commercially impossible to fulfil the contract or transforms the obligation to perform into a radically different obligation from that undertaken at the moment of the entry into the contract”. However, the scope of frustration is narrow and case authorities suggest that the threshold for relying on this doctrine is high. Similarly, a contract cannot be frustrated simply because it is more difficult to perform.
Consequences of Breach of Tenancy Agreement
If the tenant defaults in paying rent but is unable to invoke a force majeure clause or the doctrine of frustration, it would amount to a wrongful repudiation of the tenancy agreement and the landlord would be entitled to claim damages. The compensation recoverable is not limited to accrued rent and security deposits, but in some case may also include rent for the remaining unexpired lease. Therefore, tenants is advised to seek independent legal advice should they intend to invoke the force majeure clause in the tenancy agreement.
– Damien Laracy (Partner),
Nicole Wong (Associate)
Hill Dickinson Hong Kong
Editorial Note: This is a summary of the article “To What Extent Can a Hong Kong Tenant Rely on a Force Majeure Clause in the Current Coronavirus Outbreak?” which was circulated via Hong Kong Lawyer eNewsletter and posted on Hong Kong Lawyer website in March 2020.