Frustration in the time of COVID-19

Frustration in the time of COVID-19

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In response to the increasing confirmed COVID-19 cases in Hong Kong, the Hong Kong Government has enacted the Prevention and Control of Disease (Requirement and Directions) (Business and Premises) Regulation (Cap. 599F) (the “Regulation”) to implement various measures (the “Measures”), inter alia, restricting and regulating the mode of operation of catering businesses and shutting down a range of premises including amusement game centres, bathhouses, fitness centres, places of amusement or entertainment, party rooms, beauty parlours, club-houses, nightclubs, karaoke lounges, mahjong-tin kau premises, and massage establishments, until 23 April 2020 or further directions (together the “Affected Businesses”).

As we last discussed the application of force majeure clauses in commercial contracts, we shall consider in this article whether force majeure, if not the doctrine of frustration, is applicable in tenancy agreements amidst the time that businesses struggle in paying rentals (when the premises can’t be used) and consider how a properly drafted tenancy agreement may help with the situation.

The common law doctrine of frustration

In Hong Kong, the doctrine of frustration is invoked based on common law principles and with specific legislation provisions addressing the effects of frustration on contract. This is different from “force majeure” which is triggered by contractual clauses. There is no room for the doctrine of frustration to apply and set aside the contracts if parties have provided for a force majeure clause in the contracts.

Frustration arises where an event which occurs after the formation of the contract and is unforeseen, unexpected or beyond the parties’ control rendering it impossible to perform the contract, and/or where the underlying contractual purpose is radically changed from what was undertaken at the time the contract was entered.

Frustration is often narrowly construed by the Court since frustration has the effect of bringing the entire contract automatically to an end, without either party’s act or election and the parties are released from their unperformed future obligations. The Court will be slow to excuse parties from performing the contract and it will be not sufficient that the frustrating event has made a contract more onerous or costly to perform.

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