Hong Kong: Post-pandemic - Applicability of force majeure clause in contracts revisited

In brief

The COVID-19 pandemic has continued to impact the world since its outbreak in early 2020. It caused business disruptions during its various waves, including closure of workplaces, supply chain disruption, travel restrictions, social restrictions and shortage of labour.

In the past two years, several contractual disputes that resulted from COVID-19 related business disruptions were brought before the Hong Kong Courts. The Courts were often asked, inter alia, to determine whether a force majeure clause in a contract was applicable in the circumstances.


Contents

Key takeaways

  • While a force majeure clause is intended to deal with circumstances unforeseen by the parties at the time of entering into a contract, its applicability proves not to be as straightforward as the contracting parties may contemplate in the situation of the pandemic. 
  • In response to a party raising the pandemic as a triggering event to the force majeure clause and thus, absolving the party's obligation to perform, the Hong Kong Courts confirmed in various decisions that such defence should be considered with close scrutiny. The Hong Kong Courts held that a force majeure clause should be subject to strict construction and interpretation, and this approach should be equally applicable in the context of the pandemic. The recent Hong Kong Court judgments call for a need for clients to review and revisit the drafting of the force majeure clause in their agreements with reference to the potential impact of the pandemic and the consequential precautionary policies implemented thereto.
  • This alert provides some insights on the applicability of force majeure in Hong Kong having considered some of the latest judicial cases.

In more detail

There is no statutory doctrine of force majeure in Hong Kong so it remains as a doctrine under the common law, subject to the rules of contractual construction and interpretation. A force majeure clause generally gives parties the right to be excused from performance or to revise the contract upon the occurrence of unforeseen events beyond the parties' control that prevent, hinder or delay performance of the contract.

In 2020 to 2022, the Hong Kong Courts were on various occasions asked to consider, inter alia, whether a party may rely on a force majeure clause to cease contractual obligations during the pandemic. The Courts confirmed that the leading judgment made by the Court of Final Appeal (CFA) in 2009 on force majeure remains applicable in the COVID-19 context.

The CFA's judgment on the general principles of the force majeure clause can be summarised as follows:

  • The interpretation of a force majeure clause is not a "free-standing legal principle." A force majeure clause, like any other contractual provision, is to be given a fair reading in its factual matrix.
  • Since contracts are made to be performed, but a force majeure clause is invoked to remove or modify obligations of performance, it ought to be subject to a strict construction. Any ambiguity of the force majeure clause would be resolved against the party seeking to rely on the same. 
  • However, it does not mean that the Court would interpret a force majeure clause with hostility or discourage such a clause. It is still a matter of freedom of contract on the part of the parties.

We have seen cases where tenants sought to argue that the pandemic triggered the operation of a force majeure clause under the lease so they were excused from contractual obligations, such as payment of rents, until the expiry of the lease.

In a 2021 Court of First Instance (CFI) case, a tenant sought to rely on the force majeure clause1 in the tenancy agreement as a defence against the landlord's claim for rents for the whole contractual period of more than HKD 34 million. The Court applied the general principles as set out in the CFA judgment above, and interpreted the particular force majeure clause in the following manner:

  • The starting point is that a force majeure clause must be strictly construed.
  • The effect of a force majeure clause depends on the ordinary and natural meaning of specific words used in each case.
  • A force majeure clause should be construed in its own context with reference to other words in the sentence.

The tenant argued that the pandemic should be covered by the phrase "or any calamity or causes beyond the control of the Lessor" and hence, the force majeure clause would enable the tenant to determine the tenancy agreement. 

The CFI held that the words "calamity" or "causes" must be construed in the context and with reference to the starting words of the clause (i.e., "if the Premise or the Building … shall … be destroyed or damaged…"), therefore, the force majeure clause only covers destruction or damage to the premises, but not the pandemic. The tenant therefore is liable for the full amount claimed by the landlord.

In a recent 2022 CFI case, the tenant again argued that the pandemic is one of the triggering events within the scope of the phrase "and such other events beyond the control of the Landlord"2 in the force majeure clause. The Court similarly held that the phrase "such other events beyond the control of the Landlord" should cover the types of risks that are tied in with the inaccessibility or destruction/damage of the premises, and held that the pandemic does not fall within the scope of the said force majeure clause.

Implications of the recent Hong Kong judicial decisions

The COVID-19 pandemic and the relevant public health policies have indeed resulted in unforeseeable hardship in business operation. Nevertheless, no one can take it for granted that the standard force majeure clause used before the pandemic would be sufficient for providing an answer to the new challenges. As a matter of proactive risk management, the wordings of the force majeure clause under the existing contracts or any draft contracts to be entered into should be reviewed again to cater to specific needs.


1 The force majeure clause provides that "if the Premises… shall at any time during the Lease be destroyed or damaged or become inaccessible owing to the fire water storm… or any calamity or causes beyond the control of the Lessor so as to render the Premises unfit for commercial use or inaccessible (not attributable to any act or default of the Lessee) … then the rent hereby reserved or a fair proportion thereof according to the nature and extent of the damage sustained or order made shall be suspended until the Premises or Building shall again be rendered accessible and fit for commercial use…"
2 The force majeure clause provides that "[if] the Premises… are rendered unusable or inaccessible by closure order or building order issued by the Government, fire lightning explosion storm… and such other events beyond the control of the Landlord … the Rent and Service Charges or a part thereof proportionate to the extent to which the Premises shall have been so rendered unusable or inaccessible shall abate and ceased to be payable … until the Premises shall have been again rendered fit for use and accessible…"

 


Contact Information
Cynthia Tang
Partner at BakerMcKenzie
Hong Kong
Read my Bio
cynthia.tang@bakermckenzie.com
Roberta Chan
Partner at BakerMcKenzie
Hong Kong
Read my Bio
roberta.chan@bakermckenzie.com
Hugo Suen
Associate at BakerMcKenzie
Hong Kong
Read my Bio
hugo.suen@bakermckenzie.com

Copyright © 2022 Baker & McKenzie. All rights reserved. Ownership: This documentation and content (Content) is a proprietary resource owned exclusively by Baker McKenzie (meaning Baker & McKenzie International and its member firms). The Content is protected under international copyright conventions. Use of this Content does not of itself create a contractual relationship, nor any attorney/client relationship, between Baker McKenzie and any person. Non-reliance and exclusion: All Content is for informational purposes only and may not reflect the most current legal and regulatory developments. All summaries of the laws, regulations and practice are subject to change. The Content is not offered as legal or professional advice for any specific matter. It is not intended to be a substitute for reference to (and compliance with) the detailed provisions of applicable laws, rules, regulations or forms. Legal advice should always be sought before taking any action or refraining from taking any action based on any Content. Baker McKenzie and the editors and the contributing authors do not guarantee the accuracy of the Content and expressly disclaim any and all liability to any person in respect of the consequences of anything done or permitted to be done or omitted to be done wholly or partly in reliance upon the whole or any part of the Content. The Content may contain links to external websites and external websites may link to the Content. Baker McKenzie is not responsible for the content or operation of any such external sites and disclaims all liability, howsoever occurring, in respect of the content or operation of any such external websites. Attorney Advertising: This Content may qualify as “Attorney Advertising” requiring notice in some jurisdictions. To the extent that this Content may qualify as Attorney Advertising, PRIOR RESULTS DO NOT GUARANTEE A SIMILAR OUTCOME. Reproduction: Reproduction of reasonable portions of the Content is permitted provided that (i) such reproductions are made available free of charge and for non-commercial purposes, (ii) such reproductions are properly attributed to Baker McKenzie, (iii) the portion of the Content being reproduced is not altered or made available in a manner that modifies the Content or presents the Content being reproduced in a false light and (iv) notice is made to the disclaimers included on the Content. The permission to re-copy does not allow for incorporation of any substantial portion of the Content in any work or publication, whether in hard copy, electronic or any other form or for commercial purposes.