• Is SARS a Force Majeure Event? A Brief Overview of Hong Kong and PRC Law
  • June 17, 2003
  • Law Firm: Perkins Coie LLP - Seattle Office
  • The outbreak of the SARS epidemic in Greater China has produced uncertainties in the regional business environment. In light of these concerns, some companies have begun to query whether the SARS epidemic might be construed as a force majeure event that excuses them, or their business partners, from performing contractual obligations. Unfortunately, the answer to this simple question is not straightforward.

    There is a significant distinction between the common law and civil law views of force majeure principles. Under the common law, a contract may stipulate that a party may be excused from performance on account of a radical, intervening event that is expressly set out in the contract. In the absence of such a provision, the somewhat different doctrines of frustration or impossibility may be applied. In the case of the civil law tradition (including that of the PRC), force majeure principles have a statutory basis and apply to transactions upon the occurrence of such an event even when the contract is silent.

    Common Law (and Hong Kong Law)

    Doctrines of Frustration and Impossibility - Construction of Contracts

    Despite its widespread usage, the term "force majeure" is an ambiguous concept that alludes to several legal principles of construction in common law jurisdictions. In the United Kingdom, the term is associated with the doctrine of frustration, while its American counterpart is sometimes called the doctrine of impossibility. These concepts are legal theories of construction, i.e., the interpretation of the intent of the parties where the contract is silent about the impact of an extraordinary intervening event upon their obligations.

    Readers might recall (with a groan) the venerable British case of Krell v. Henry, [1903] 2 K.B. 740 (C.A.), from their law school contracts class. Krell is the primary authority for the doctrine of frustration in common law generally and Hong Kong law in particular. A tourist had rented a hotel room that afforded an excellent view of the route for King Edward VII's coronation parade. This special rent was at a daily rate many times greater than the normal rate for such a room. The hotel contract did not contain any provisions about the respective rights of the parties in the event of a cancellation of the coronation. When appendicitis suddenly struck down His Majesty, the British government canceled the parade. Seeing that the party had been called off, the tourist cancelled his reservation. In turn, the hotel sued its erstwhile guest for unpaid room charges. In excusing the defendant from paying the hotel, the Krell court held that the underlying purpose of the contract, as indicated by the high daily rate charge, was frustrated when the festivities were called off. The hotel guest was let off the hook on account of the ensuing frustration of purpose.

    Under the doctrine of frustration, a contractual obligation may be discharged even though the parties foresaw or ought to have foreseen the frustrating event. Further, the doctrine is in all cases subject to the important limitation that the frustrating circumstances must arise without fault on the part of either party. The defense of frustration can therefore be defeated by proof of fault, and the burden of proof of fault lies upon the party alleging it. Common types of frustrating events include physical destruction of the subject matter of the contract, cancellation of an expected event, delay, subsequent changes in the law and death or incapacity. A contract is not discharged merely because it turns out to be difficult to perform or onerous.

    The foreseeability of the intervening event has become a consideration in some common law jurisdictions. For instance, there is a famous New York federal court case that dealt with the doctrine of impossibility and could serve as persuasive authority in Hong Kong. In American Trading & Prod. Corp. v. Shell Int'l. Marine, 453 F.2d 939 (2d Cir. 1972), an ocean carrier asserted that it was discharged of its obligation to deliver goods because of the closing of the Suez Canal on account of the Six Day War of 1967. The court rejected this assertion by noting that the parties had entered into the contract at a time when there was widespread coverage of rising tensions in the Middle East. A prudent ocean carrier would have made arrangements for shipment around the Cape of Good Hope, or at least procured insurance to cover any increased costs for a redirection of the shipment. This case, along with Krell, stands for the principle that a court may augment the terms of a contract to account for a radical intervening event. What happens if the contract includes express provisions governing circumstances when performance is excused?

    Force Majeure Clauses

    Hong Kong law does not recognize a doctrine of force majeure as a principle of construction. Rather, a contract must include an express force majeure provision that enumerates the triggering events that excuse or postpone performance by a party. For example, in Sun Wah Oil & Cereals Ltd. v. Gee Tai Trading Co. Ltd., [1993] HKC 132, the Hong Kong Court of Appeal held that the provision "Force majeure/arbitration: standard terms to apply" contained in a sale of goods contract was a meaningless term for which there were no standard applicable terms. The seller in that case, having put forward an offer containing a meaningless term for force majeure could not claim force majeure as an excuse for failure to perform his obligations.

    A force majeure clause often sets out the types of circumstance envisaged by the parties. For example, war, strikes, or direct legislative or administrative interference, such as an embargo, refusal of licence, or seizure, are typical force majeure events found in Hong Kong contracts. Under a typical force majeure clause, the party relying upon force majeure must prove that (i) one of the events referred to in the clause occurred and that the party was prevented, hindered or delayed from performing the contract by reason of that event; (ii) its nonperformance was due to circumstances beyond its control; and (iii) there were no reasonable steps that it could have taken to avoid or mitigate the event or its consequences.

    It is important to note that the force majeure clause must be construed in each case with due regard to the nature and general terms of the contract and, in particular, with regard to the precise words of the clause. It is not viable to assume when drafting the clause that a "standard" provision will cover all unexpected contingencies.

    PRC Law

    PRC law defines "force majeure" (bu ke kang li) as being similar to the doctrines of frustration and impossibility. For example, Article 153 of the General Principles of the Civil Law of the People's Republic of China states that "force majeure" refers to objective circumstances that cannot be foreseen or avoided and cannot be overcome. The General Principles also provide that unless otherwise required under law, a party does not incur civil liability if it fails to perform a contract or causes losses and damages to the other parties due to a force majeure event. To illustrate, the Ministry of Commerce has issued an internal notice in recent weeks to trading companies, noting that the refusal of foreign embassies in Beijing to issue business visas to PRC individuals may constitute a force majeure event if a trading company cannot discharge its contractual obligation on account of its inability to obtain a visa.

    The Contract Law of the People's Republic of China recognizes the same definition for force majeure. Under Article 94 of the Contract Law, the parties may cancel the contract if the purposes of the contract cannot be fulfilled due to force majeure. Furthermore, Article 117 reiterates that if a party cannot perform a contract due to force majeure, unless otherwise required by law, the defaulting party can be fully or partially exempted from liabilities, depending on the impact of the force majeure event.

    Article 118 of the Contract Law also requires the defaulting party to notify the other party on a timely basis to mitigate the losses incurred by the other party and to provide evidence of the force majeure event within a reasonable timeframe. Boilerplate force majeure provisions sometimes require the parties to obtain a written certificate from the "competent authorities" as evidence of the occurrence of a force majeure event. This can be difficult. For example, in the aftermath of the June 4 Incident, both Chinese and foreign parties were bedeviled by the unwillingness of any PRC authority to issue a certificate testifying to civil unrest.

    While we are not aware of any PRC judicial cases on this issue, a Hong Kong case has addressed the significance of the certificate requirement in a standard PRC contract. In Hoecheong Products Co. Ltd. v. Cargill Hong Kong Ltd., [1993] 2 HKC 103, a seller relied upon a force majeure provision that required a certificate to be issued by the China Council for the Promotion of International Trade (CCPIT) or an independent and competent PRC authority attesting the force majeure event stated in the provision. The legal issue before the court was whether the issuance of the certificate by CCPIT was sufficient to excuse the seller from further performance. The issue ultimately came before the Judicial Committee of the Privy Council in London as the final appellate. The Lordships held that the requirement for a certificate was in addition to, not a substitute for, proof that facts existed that brought the force majeure exception into play.

    Hoecheong is not an authoritative interpretation of PRC law, given that it was decided by the Privy Council. It is possible that a PRC People's Court might decide differently in other cases.

    Unlike the common law, PRC law recognizes the application of force majeure to legal issues beyond contract law. Specifically, PRC procedural law recognizes that a People's Court has discretion to reset procedural deadlines in light of a force majeure event. The PRC trademark authorities similarly may extend filing deadlines on account of an overseas force majeure event.

    So What's the Answer? Is SARS a Force Majeure Event?

    It depends. Under Hong Kong law, if a contract is otherwise silent, a contract party will need to demonstrate that the outbreak of SARS frustrated the purpose of the contract. This is a question of interpretation that depends upon the circumstances surrounding the performance of the contractual obligations and the impact of the SARS outbreak, as construed by a Hong Kong court. This is inevitably difficult to forecast. However, the express inclusion of the word "epidemic" in a force majeure clause provision certainly helps further the argument that a force majeure event has occurred (but not that a contract party is necessarily relieved from performance).

    PRC law enshrines a theory that resembles its Hong Kong and common law counterpart, without the requirement that force majeure events must be expressly enumerated in the relevant contract. Under PRC law, contract parties have more leeway to argue the force majeure character of a specific event, but given the paucity of judicial opinions, an express provision provides more clarity.

    In considering whether SARS is a force majeure event under Hong Kong or PRC law, clients will need to consider some common issues, which raise more questions about the circumstances of the transaction. For example:

    • Does the epidemic cause nonperformance? If the contract envisages other avenues of performance or delays that can be mutually agreed upon without a material impact upon a party, it becomes difficult to assert that the epidemic was the cause of nonperformance. For example, under a technical training contract, the SARS epidemic might relieve a party's nonperformance if its trainers or trainees could not attend training sessions. However, a party is not relieved if performance simply becomes more onerous. A party's assertion that it could not get to a bank to wire funds in fulfillment of a payment obligation does not sound plausible.

    • Was the epidemic unforeseeable or unavoidable, as well as insurmountable? This inquiry raises many issues. When was the contract signed -- before or after the outbreak? When precisely did the outbreak occur? Where was the contract signed?

      A party might be able to argue that a contract was signed by in-country personnel who could not have foreseen the epidemic because of the PRC news blackout in April. But then, did in-country personnel have access to international news reports or to e-mails from the home office?

      Could a mainland company claim that the SARS epidemic was unforeseeable until the sacking of the Minister of Health? If so, what if it has overseas personnel in Hong Kong and elsewhere? Certainly overseas colleagues would have forwarded e-mails with more detailed overseas reports on the epidemic. How far were these distributed within the mainland company? Given the government's stance against rumormongering, was it lawful to forward these reports to others within the mainland company?

      Travel restrictions might be cast as a force majeure event. Could a party avoid the impact of the epidemic upon the closing of a transaction by facsimile transmittal of execution pages? If the SARS epidemic prevented a party's ability to travel in the PRC, were there alternatives? Was a key person whose presence was required quarantined? That sounds like something that passes muster under both Chinese and Hong Kong law.

    • Has the party seeking to excuse its performance taken steps to mitigate damage? If a party procures alternative sourcing or servicing methods, both PRC and Hong Kong law would probably not waive liability in such an instance, but would reduce damages.

    • Has documentary proof been obtained if required by the contract? If not, this does not necessarily mean that a party cannot assert a defense of force majeure under PRC law, or the frustration of the underlying purpose under Hong Kong law.

    Revisiting "Standard" Force Majeure Clauses

    The SARS epidemic also raises the prospective need for legal counsel to tailor force majeure provisions for PRC-specific triggering events. Looking back over the past 20 years, foreign and Chinese companies have had to deal with a litany of events that prudent counsel would include in a force majeure clause: civil unrest (before and after June 4), SARS, cholera and hepatitis epidemics, flooding along the Chang Jiang and other rivers, typhoons, severe snow storms (in the inland provinces), earthquakes, sabotage (such as violence arising from unemployment problems in Dong Bei), strikes conducted at foreign-invested factories, and demonstrations (such as in the aftermath of the Belgrade bombing). Counsel should creatively redraft force majeure clauses in light of these types of PRC-specific issues and the subject matter of their contracts. As always, it is better to include a comprehensive list of events in a force majeure clause, bearing in mind that no one provision will necessarily provide protection in every case.