Force Majeure and Frustration of Contract in Hong Kong: When Contracts Fail Due to Unforeseen Events

Introduction

The COVID-19 pandemic, geopolitical upheaval, natural disasters, and supply chain disruptions have prompted businesses across Hong Kong to examine whether their contractual obligations are excused by unforeseen events beyond their control. Two legal doctrines are central to this analysis: force majeure and frustration of contract.

While these concepts are related, they operate differently under Hong Kong law. Force majeure is a contractual provision — it applies only if expressly included in the contract. Frustration is a common law doctrine — it can apply even where the contract contains no force majeure clause, but its requirements are strict and its consequences can be dramatic. Understanding the differences, requirements, and consequences of each doctrine is essential for any commercial lawyer or businessperson operating in Hong Kong.

This article provides a comprehensive analysis of force majeure and frustration of contract under Hong Kong law, drawing on key cases and examining the practical implications for contracting parties.

Force Majeure: A Contractual Concept

What Is Force Majeure?

Force majeure (from the French: "superior force") refers to a contractual clause that excuses a party from performance of its obligations when an extraordinary event or circumstance beyond its reasonable control prevents performance. Unlike frustration, force majeure is not a doctrine imposed by law — it applies only where the contract expressly provides for it.

A well-drafted force majeure clause typically:

• Defines the triggering events (often with a combination of specific examples and a general catch-all)
• Specifies the causal connection required between the force majeure event and the party's inability to perform
• Sets out the notice and mitigation obligations that the affected party must comply with
• Defines the consequences of a force majeure event (suspension of obligations, entitlement to additional time, or termination if the event continues beyond a specified period)

Common Force Majeure Events

Force majeure clauses vary considerably in their scope. Commonly listed triggering events include:

• Acts of God (earthquakes, floods, typhoons, and other natural disasters)
• War, armed conflict, terrorism, and civil unrest
• Government action, regulatory changes, and trade embargoes
• Industrial action (strikes, lockouts) in some clauses
• Epidemics and pandemics (a provision that gained renewed attention during COVID-19)
• Fire and explosion
• Power or infrastructure failures beyond the party's control

Force majeure clauses do not generally cover economic hardship, market downturns, or circumstances that merely make performance more expensive or less profitable — these are normal commercial risks that a contracting party assumes when entering the contract.

Requirements for Invoking Force Majeure

To successfully rely on a force majeure clause under Hong Kong law, the invoking party must typically establish:

The event falls within the clause: The event relied upon must be within the definition of force majeure events in the contract. Courts construe force majeure clauses strictly, and a party cannot extend them beyond their natural meaning.

Causal connection: The force majeure event must have actually prevented, hindered, or delayed performance of the relevant obligation. It is not sufficient that the event occurred; the party must show a direct causal link between the event and the inability to perform.

Beyond reasonable control: The event must be beyond the party's reasonable control. A self-induced or foreseeable event will not qualify. If a party contributed to the circumstances that prevented performance, the force majeure defence may fail.

No alternative means of performance: In many clauses, the party must show that there is no alternative way to perform the obligation, or that all reasonable steps to overcome or mitigate the impact of the event have been taken.

Timely notice: Most force majeure clauses require the affected party to give notice within a specified period (often 7 to 14 days) of becoming aware of the force majeure event. Failure to give timely notice may disentitle the party from relying on the clause.

Consequences of a Force Majeure Event

The consequences depend on the specific wording of the clause:

Suspension: The most common consequence is suspension of the obligation to perform for the duration of the force majeure event, with a corresponding extension of time.

Termination: Where the force majeure event continues for a prolonged period (defined in the contract), either party may typically terminate the contract without liability. Accrued rights (e.g., payments already due) generally survive termination under a force majeure clause.

Limitation of remedies: Some force majeure clauses exclude liability for damages arising from the force majeure event, while preserving the right to terminate.

Frustration of Contract: The Common Law Doctrine

What Is Frustration?

The doctrine of frustration was developed by English courts (and adopted in Hong Kong) to address cases where, after a contract is formed, an unforeseen event occurs that makes performance radically different from what the parties originally contemplated. Frustration is a doctrine of last resort: courts apply it sparingly, as it automatically brings the contract to an end and adjusts the parties' rights and obligations under statute.

The leading English case is Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696, which held that frustration occurs where "without default of either party, a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract."

Requirements for Frustration

For frustration to be established under Hong Kong law:

Unforeseen supervening event: An event must have occurred after the contract was formed that was not anticipated by the parties at the time of contracting. If the event was foreseeable, the courts are unlikely to accept a frustration argument — the party should have provided for it in the contract.

Radical change in circumstances: The event must have caused the obligations to become radically different from those originally undertaken. Mere inconvenience, increased cost, or reduced profitability does not satisfy this requirement. The event must fundamentally change the nature of what was promised.

Not self-induced: Frustration cannot be claimed by a party who caused or contributed to the frustrating event.

No allocation of risk in the contract: If the contract expressly or impliedly allocates the risk of the supervening event to one party (for example, through a force majeure clause or a hardship clause), the doctrine of frustration will not apply — the contractual risk allocation governs.

Circumstances That May (and May Not) Frustrate a Contract

Hong Kong courts have found frustration in cases involving:

• Destruction of the specific subject matter of the contract (e.g., a venue hired for a specific event that burns down)
• Permanent illegality caused by a change in law after the contract was formed
• Death or incapacity of a person whose personal performance was the essence of the contract

Courts have rejected frustration in cases involving:

• Increased cost or difficulty of performance (even if substantial)
• A fall in demand for the contracted goods or services
• Government regulations that merely make performance more burdensome
• Events that were foreseeable at the time of contracting

COVID-19 and Frustration in Hong Kong

The COVID-19 pandemic prompted a wave of frustration arguments in Hong Kong courts, particularly from tenants seeking to avoid paying rent, and from parties to event, hospitality, and services contracts. The Hong Kong courts were generally reluctant to find frustration merely because government-imposed restrictions made performance more difficult or economically unattractive. Frustration was more likely to be found where the specific purpose of the contract was permanently defeated by the restrictions, rather than merely delayed or hindered.

Consequences of Frustration: The Law Reform (Frustration of Contracts) Ordinance

When a contract is frustrated, it is discharged automatically — no further performance by either party is required. However, the question of how to deal with money paid or benefits conferred before the frustration is governed by the Law Reform (Frustration of Contracts) Ordinance (Cap. 50).

Key provisions include:

• Sums paid before the frustrating event may be recovered, subject to the court's power to allow the payee to retain a portion to cover expenses incurred before the event
• Obligations to pay sums that accrued before the frustrating event are discharged
• Where a party has obtained a valuable benefit under the contract before frustration, the other party may recover a just sum in respect of that benefit

The Ordinance gives the court considerable discretion to achieve a fair apportionment of losses between the parties, reflecting the principle that frustration should not produce unjust enrichment of one party at the other's expense.

Hardship Clauses: A Middle Ground

Some international commercial contracts — particularly those governed by the UNIDROIT Principles or drafted for cross-border transactions — include hardship clauses, which require parties to renegotiate the terms of the contract where a change in circumstances fundamentally alters the equilibrium of the contract without rising to the level of frustration. Hardship clauses are not a standard feature of Hong Kong-law contracts but are occasionally encountered in international commercial agreements.

Practical Guidance for Commercial Parties

Include a well-drafted force majeure clause: A comprehensive force majeure clause, tailored to the specific risks of the transaction, provides greater certainty than reliance on the common law doctrine of frustration. The pandemic has prompted many businesses to expand their force majeure definitions to expressly include epidemics, pandemics, and government-imposed restrictions.

Include notice and mitigation obligations: Ensure the force majeure clause contains clear notice requirements and mitigation obligations. A party that invokes force majeure but fails to take reasonable steps to overcome the impact of the event may lose the protection of the clause.

Address the termination trigger: Specify the duration after which either party may terminate in the event of a prolonged force majeure event, and address the consequences for accrued rights and obligations.

Assess frustration arguments carefully: Before invoking frustration, assess carefully whether the legal requirements are met. Wrongly asserting frustration — and refusing to perform on that basis — may itself constitute a repudiation of the contract, exposing the party to a damages claim.

Document the impact of the event: If relying on force majeure or frustration, maintain contemporaneous records of the impact of the event on performance, steps taken to mitigate, and communications with the counterparty.

How Alan Wong LLP Can Help

Our corporate and commercial practice advises businesses on the drafting and interpretation of force majeure clauses, the assessment of frustration arguments, and the management of contractual disputes arising from unforeseen events. We assist clients in evaluating whether force majeure or frustration is available in their specific circumstances, advise on the notice and mitigation obligations required, and represent clients in disputes before the Hong Kong courts and in arbitration.

If you are facing contractual difficulties arising from an unforeseen event and wish to understand your legal options, please contact our team for a confidential discussion.