Hong Kong – ‘The New Normal’.

 

9 December 2020

 

 

Introduction
 

Hong Kong has just entered its Covid-19 ‘fourth wave’ resulting in further restrictions to everyday life which give rise to continued uncertainty for businesses including, of course, the construction industry. At the same time the UK (with its lock-down tier system) is about to implement mass immunization – which it must be hoped will ultimately trigger in the UK and elsewhere the end of the pandemic.
 

It has undoubtedly been a difficult year for the Hong Kong construction industry. It is hoped that Employers and Contractors will take a reasonable and pragmatic approach to their contracts when dealing with the effects of the pandemic. As the FIDIC ‘Golden Principles’ reminds its users (as provided in its FIDIC Covid-19 Guidance Memorandum) they should keep in mind that FIDIC:
 

• Promotes cooperation and trust between contracting parties;
   

• Does not support any Party taking undue advantage of its bargaining power;
   

• Discourages adversarial attitudes and encourages dispute avoidance; and
   

• Encourages timely and adequate payment in accordance with the Contract to maintain cashflow.
   

Whether such laudable principles will be applied to the administration of construction contracts in Hong Kong remains to be seen.
 

This article provides a brief overview of some of the rights and remedies that are available to contractors both contractually and at law.
 

Force Majeure
 

Force majeure is used to describe an event that occurs which is beyond the control of the parties, and which prevents them from fulfilling their contractual obligations. It is a Civil Law rather than a Common Law concept. For instance, force majeure is enshrined in the UAE Civil Code at Article 273 which provides that in the event of a force majeure which makes the performance of a contract impossible the contract ‘shall be automatically cancelled’.
 

A force majeure event is often an event which is:
 

• Not within the reasonable control of either of the parties – this should not be contentious;
   

• Unforeseen or unforeseeable at the time of entering into the contract. This could be contentious, namely, at what stage did Covid-19 actually become foreseeable, arguments may turn on announcements made by the WHO; and
   

• More than mere inconvenience or impracticality. This again could be contentious – just because measures to prevent the spread of Covid-19 result in inconvenience to site operations or make them impractical does not give rise to an event of force majeure.
   

There is, however, no precise legal definition of force majeure in many jurisdictions, including Hong Kong. Therefore, force majeure is a creature of contract. Standard form building contracts deal with force majeure in different ways. Parties may, or may not, choose to incorporate a definition of what constitutes force majeure into their contract. As a result, it can be difficult to predict with any certainty what will constitute force majeure which means interpreting the contractual provisions on a case by case basis and the surrounding facts.
 

In Hong Kong, most Employers’ standard form contracts, including typically Hong Kong Government, Mass Transit Railway Corporation and Hong Kong Airport Authority do not include force majeure provisions in their contracts Other forms are typically amended to provide for extensions of time but no additional payment.
 

Frustration
 

In the absence of force majeure provisions in many standard forms in Hong Kong, contractors may need to rely upon the Common Law doctrine of frustration. This doctrine applies under Hong Kong law when, among other things, the contract becomes factually or commercially impossible to perform, or the parties’ rights and obligations are transformed into circumstances that are radically and fundamentally different. It requires that neither party can be ‘blamed’ for the event and that they could not have reasonably foreseen the event at the time of entering into the contract. The doctrine of frustration provides relief by discharging the contract on the ground that it would be unjust to force the parties to continue performance.
 

However, it should be borne in mind that the doctrine of frustration is construed narrowly by the courts and cannot be relied upon to escape a bad bargain. It is therefore up to the party seeking to excuse its performance to show precisely how its agreed right or obligation has been frustrated. 
 

The current circumstances may be likened to that of the SARS epidemic in 2003. In Li Ching Wing v Xuan Yi Xiong [2004] 1 HKLRD 754 the Court considered whether SARS operated as a frustrating event. In this case, a tenant under a two year lease sought to rely upon the doctrine of frustration to terminate a lease by claiming that he was subjected to a ten day SARS related isolation order. 
 

This argument was firmly rejected by the Court on the basis that a ten day order was insignificant as against the two year lease period and, although an unforeseeable event, did not significantly change the nature of the outstanding contractual rights or obligations of the parties.
 

The closing comments of District Judge Lok in this case are, in the light of what is currently happening in Hong Kong, somewhat poignant when he stated about the SARS epidemic that, “Perhaps, we can only hope that the people in Hong Kong do not have to face the same crisis again in the future”.
 

Recently, similar arguments concerning the social effects of Covid-19 have been run by a tenant in order to avoid arrears of rent under a tenancy agreement. In The Center (76) Ltd v Serviced Office (HK) Ltd [2020] HKCFI 2881, Deputy High Court Judge To rejected the defendant Tenant’s argument that, among other things, the tenancy had been frustrated or in the alternative that its liability to pay rent was suspended by events constituting “Acts of God” under clause 7.1 of the Tenancy Agreement. Clause 7.1 included events such as the Premises being unfit for occupation, or inaccessible not due to any default of the Tenant but owing to fire, earthquake…or if any time during the Term (of the Tenancy) the Premises shall be condemned as a dangerous structure.
 

On the frustration argument, Deputy High Court Judge To in rejecting the Tenant’s arguments stated that there had been no change in the nature of the Tenant’s obligation, though the social disruption and Covid-19 pandemic must have rendered the Tenant’s business operation more onerous and not profitable. The Deputy Judge further stated that the doctrine of frustration is not to be lightly invoked to relieve contracting parties of the normal consequences of imprudent commercial bargains or commercial risk.
 

In respect of the Tenant’s argument concerning “Acts of God” Deputy High Court Judge To stated that there was no evidence that clause 7.1 had been triggered and the Tenant had not adduced any authority to support the proposition that social disruption amounted to an act of God. In fact the Premises were still being used by the Tenant for the purpose for which they were rented.
 

Applying the Court’s approach in the construction context it is clear that the effects of Covid-19 on site operations is unlikely to result in a contract being frustrated, for instance, as a result of difficulties with movement of site labour to a site and around a site. More onerous and uneconomic site operations are unlikely to amount to a contract being frustrated.
 

Change in Law
 

Another potential remedy to compensate for the effects of Covid-19 is to rely upon a change in law contractual provision which may provide relief from contractual obligations and liabilities and, importantly, whether the party seeking relief can pass on or recover some of the cost of complying with changes in law. At the outset, it should be pointed out that a change in law does not typically provide any relief (in terms of time and money) to contractors under the Hong Kong Government, Mass Transit Railway Corporation and Hong Kong Airport Authority standard forms.
 

A change in law clause will typically provide the terms on which the party supplying goods or services under a contract (or in some cases, both parties) can recover the increased cost in contract performance due to a change in the law. This is quite distinct from any force majeure, as parties relying on change in law clauses may be entitled to financial relief from an increase in costs caused by changes to the law affecting their contracts, as opposed to only being excused from performance of contractual obligations.
 

Firstly, what constitutes a change in law? There is no generally accepted definition of what this is. It will turn on how the term is defined in each contract. It will also be necessary to consider whether only primary legislation (in the form of Ordinances or regulations) is caught. Contracts will vary on the extent to which secondary legislation and other instruments such as guidelines, industry codes and regulatory or government policies are within scope.
 

In many jurisdictions, government edicts on COVID-19 have been guidance rather than primary or secondary legislation. In Hong Kong, the fourth wave has triggered subsidiary legislation measures under the Prevention and Control of Disease (Requirements and Directions) (Business and Premises) Regulation (Cap.599F). Breach of these requirements is a criminal offence. Parties should review the relevant government publications closely to determine what authority or legal standing it has and how this ties in with the change in law clause in their particular contract. 
 

Not all changes in law will qualify for relief or an ability to recover costs. Again, the terms of the applicable contract must be closely considered as other conditions may apply. Foreseeable changes in law, relating to normal or predictable changes that affect all businesses, often do not qualify for relief under a contract. Parties are typically expected to live with such changes in the normal course of business.
 

In addition, general changes in law, which affect all businesses operating within a similar sector, market or industry, are commonly distinguished from specific changes in law, which cover changes that have a significant effect on the costs incurred by the party to the contract as compared to all other businesses in the same sector. 
 

While general changes in law will not usually give rise to relief or an ability to recover costs (because the affected party would likely be required to comply with such changes notwithstanding the fact that the contract has been entered into), specific changes in law do usually give rise to such rights to recover costs, given that those costs would not have been incurred save for the affected party entering into the contract.
 

It should also be borne in mind that to benefit from change in law provision in a contract there must be a causal link between the change in law and the adverse impact on the relevant party. Generally speaking, a party will only be entitled to financial relief where a change in law directly affects the services or that party’s other obligations under the particular contract.
 

The ‘New Normal’
 

Life in the ‘New Normal’ is at the very least a daily challenge. For contractors, rights and remedies in respect of the pandemic appear scant. Force majeure is unlikely to be included in most standard form construction contracts, frustration is a narrowly construed doctrine and change in law provisions are likely to be a difficult claim if, in fact, the contract actually provides any relief for such changes. 
 

Clearly though, each contract needs to be reviewed as a whole and in the light of the specific facts and circumstances. Relief may of course come from other parts of a contract or at law (not covered by this article), for instance, relying upon acts of prevention and upon instructions provided by contract administrators or variation provisions.
 

Let’s hope that this time next year Covid-19 is a distant memory.
 

 

For further information, please contact:

 

Richard Lyons, Partner, Hill Dickinson

richard.lyons@hilldickinson.com