Coronavirus (COVID-19) - Impact on Business Contract

Doctrine of Frustration

The general position for performance of contractual obligations is that agreed contractual obligations must be carried out, even if there is a change in circumstances which has made performance more difficult, expensive or even impossible.

An exception to this general position is the application of the doctrine of frustration. The effect of frustration automatically brings the contract to an end. The parties to the contract will no longer be bound to perform their future obligations, and therefore releasing both parties from their remaining obligations.

In the absence of an express force majeure clause in a contract, parties affected by COVID-19 may be able to rely upon the doctrine of frustration.

For frustration to apply, the event or circumstances must:

• occur after the contract has been formed
• not be the fault of any party to the contract;
• are not foreseen by the parties; and
• render further performance of the contract impossible, illegal or makes it radically different from that contemplated by the parties at the time of the contract.  

However, the threshold for proving frustration is much higher than that for most force majeure clauses, and it must be shown that the obligations affected by the event or circumstances are fundamental to and go to the roof of the contract.

The courts are usually very reluctant to invoke frustration, it remains to be seen whether the unusual situations caused by COVID-19 would enable the party to invoke the doctrine.

In Li Ching Wing v Xuan Yu Xiong, the Hong Kong Court held that the a ten-day isolation order issued by the Department of Health in response to an outbreak of SARS in a residential premises would not frustrate a 2-year fixed term lease for use of a flat in the building.

The outcome may be different if the interruption was expected to last for the period of the unexpired term of the lease, or at least, for a long period of it.

Therefore, parties affected by COVID-19 should carefully assess and consider the implications before seeking to claim relief under the doctrine of frustration as the application of the doctrine would have profound effect on the contractual parties’ rights and obligations.

 

For legal advice or services on corporate & commercial disputes and matters, please contact CHOW & CHEUNG, Hong Kong Solicitors & Notary Public [Tel: +852 2856 3799 or Email: cac@ccsn.hk ]

Website: www.ccsn.hk

 

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