SARS - a "frustrating" event?

The damaging effect of SARS on Hong Kong’s economy has been well documented in the local and worldwide media. Consumer spending and tourism have been particularly badly affected, against a background of anxiety and uncertainty. Many events due to be held in Hong Kong, and in other parts of the world, have been cancelled due to concerns about SARS. In this context, affected parties and their legal advisers are having to consider the possible impact of SARS on a variety of contractual situations. Two issues, in particular, require consideration. First, the possible application of the common law doctrine of frustration. Second, the operation of contractual "force majeure" clauses.  

The common law doctrine of frustration generally operates to discharge a contract where a supervening event occurs (without the default of the parties concerned and for which the contract does not make sufficient provision) which results in performance of the contract being physically or commercially impossible, or the obligations under the contract being radically different to those originally undertaken. The doctrine normally operates within relatively narrow confines. It cannot usually be invoked merely to relieve a party from an imprudent commercial bargain, nor where the parties have foreseen the relevant event and provided for it in the contract. A contract is unlikely to be frustrated merely because performance has become more onerous or less profitable than the parties had hoped would be the case. In addition, the purported supervening event should not be explicable by reason of the conduct of the party seeking to rely on it.

Unfortunately, there appears to be a dearth of Hong Kong or English case law that specifically addresses the situation where an alleged frustrating event arises out of, or in connection with, an epidemic (such as SARS). However, the doctrine of frustration is generally capable of applying to different types of situations. Therefore, general principles gleaned from existing case law will have to be applied to possible contractual situations where SARS may have an impact.

For example, the doctrine of frustration may possibly be relied upon where an exhibition or event is cancelled, as a result of SARS. The cancellation of the exhibition or event may "frustrate" the contract, if it can be said to have destroyed the "commercial purpose" of the contract.

A party might also seek to rely on the doctrine of frustration if performance of a contract is affected by subsequent changes in the law. With regard to SARS, certain orders have been made in Hong Kong, under the Quarantine and Prevention of Disease Ordinance, in an attempt to prevent the spread of the virus. Consequently, a contract may be frustrated where the terms of such an order, or any other legislation, render performance of a contract impossible or illegal.

At common law, frustration usually results in the contract concerned being brought to an end forthwith (and both parties being released from any further obligations). Provision for the possible recovery of money paid under certain contracts is made by the Law Amendment and Reform (Consolidation) Ordinance (modelled on the Law Reform (Frustrated Contracts) Act 1943 in the UK).

In contrast to the doctrine of frustration, a force majeure clause enables the parties to a contract to allocate the risk of an unforeseen event adversely affecting one party’s ability to perform its contractual obligations on time or at all. As such, it will normally attempt to exclude the operation of the doctrine of frustration. The provisions of a well-drafted force majeure clause can often be considerably more sophisticated than the automatic discharge of obligations that may result from the application of the doctrine of frustration. For example, the parties may provide for obligations to be merely suspended for a given period (after the expiry of which discharge may occur) and may also set out detailed provisions regarding who is to retain the benefit of monies paid or work done under the contract, after the occurrence of the force majeure event.

"Force majeure" does not have a precise legal definition, but its meaning is more extensive than an "Act of God". Typically, a force majeure clause will list a number of events, the occurrence of which may excuse a party from its obligations under the contract. The word "epidemic" is listed as such an event in many commercial contracts. Therefore, in such circumstances and in light of the World Health Organisation’s classification of SARS as an epidemic, a party to a contract containing a force majeure clause should not have too much difficulty in asserting that the SARS outbreak triggers the provisions of that clause.

Conclusion

If a party believes that its obligations under a contract have been affected by SARS, it should first consider whether the contract includes a force majeure clause. If the contract contains no such clause, or if SARS does not fall within the scope of the clause, a party may seek to rely on the doctrine of frustration to discharge the contract. Such reliance is only likely to be successful if the effect of SARS can be shown to render performance of the contract impossible, or only possible in a very different way from that originally contemplated. Mere inconvenience, or hardship, or financial loss in performing the contract, or delay which is within the commercial risk undertaken by the parties, will usually be insufficient to frustrate a particular contract. Given the relatively narrow confines of the doctrine of frustration (at common law), now is an apt time to review the force majeure clauses (if any) in contracts pursuant to which parties conduct their businesses. Otherwise, contractual parties may be storing up problems for the future and without the comfort of knowing how long SARS will last and whether or not it is a one off event.

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