Covid-19: Impact on commercial contracts – Common Law
How is the applicable law determined by the courts in case of commercial contracts?
In the UK courts, in civil and commercial matters, the rules on applicable law in contracts are set out by EU Regulation 593/2008, known as “Rome I". Although an EU Regulation this will, in relation to contracts entered into before the end of the UK’s EU exit transition period, continue to be applied by the UK courts (by virtue of provisions in the UK/EU Withdrawal Agreement) and, in relation to those entered into thereafter, will largely be retained by UK law in a domesticated form.
Under Rome I, effect is generally given to the parties’ express choice of law. There are, however, limited exceptions which may, depending on the circumstances, apply. For example, assuming that English law is the parties’ chosen law (as is the most common situation where the English courts have been chosen in a jurisdiction clause) two of the most notable examples to be aware of would be: (i) where all elements relevant to the situation at the time of the choice are located in a country other than the country whose law has been chosen, the parties’ choice shall not prejudice the application of provisions of the law of that other country which cannot be derogated from by agreement (Article 3(3) Rome I); and (ii) effect may be given to the overriding mandatory provisions of the law of the country where the obligations arising out of the contract have to be or have been performed, in so far as those provisions render the performance of the contract unlawful (Article 9(3) Rome I).
If the parties have chosen a law other than English law to govern their contract then, in addition to the above, other exceptions permitted by Rome I may apply. In this situation, further notable exceptions include the application of public policy, and overriding mandatory rules, of the forum (in this case England) (Articles 9(2), 21 Rome I).
In the rare occasions where commercial parties have not expressed a choice of law to govern their contract, Rome I also provides rules which determine what law will apply.
Rome I applies in any situation where there is a “conflict of laws”, that is where there is any foreign element to the situation. In a wholly domestic situation, domestic law would apply.
Note that in certain, specific types of contract (insurance, consumer and employment contracts) special rules and regimes apply which can further impact on the efficacy of the parties’ choice.
Hong Kong SAR
In Hong Kong SAR, the general rule is that the courts will give effect to the parties‘ express choice of law to govern a contract, provided that it is expressly reflected in the contract, and the governing law choice was made bona fide.
Parties are at liberty to choose Hong Kong SAR law even though the transaction might have no connection to Hong Kong SAR. However, note that regardless of the parties‘ choice of law, the Hong Kong SAR courts will not enforce a contract with a subject matter that is illegal in the jurisdiction in which the contract is to be performed. Further, in giving effect to the contract, the Hong Kong SAR courts will be confined by Hong Kong SAR’s mandatory laws and/or domestic public policy.
In absence of an express choice of governing law, the courts will consider whether there is a factual basis for inferring such an agreement from the particular facts and commercial realities of the matter, and failing that, the test of the closest and most real connection would apply, that is treating the contract as governed by “the system of law by reference to which the contract was made or that with which the transaction has its closest and most real connection”. In applying this test, common factors accounted for by the courts include the location of the subject matter of the contract, place of intended performance, use of legal terminology of a particular jurisdiction, and express choice of a place for dispute resolution.
Notwithstanding the above principles, it is worthwhile to note that these principles may be displaced in respect of certain categories of contracts, like sales of goods contracts and contracts of carriage etc, where special conflict of law rules may apply.
The Singapore courts will generally give effect to the parties’ express choice of law to govern a contract. However, note that regardless of the parties’ choice of law, the Singapore courts may also not enforce a contract with a subject matter that is illegal in the jurisdiction in which the contract is to be performed and may apply Singapore public policy or overriding mandatory rules of Singapore law. If the parties have not made any express selection, the court may infer a choice from the contract and the surrounding circumstances at the time of the making of the contract. If such an inference cannot be made, then the court will determine the proper law as being the system of law with the closest and most real connection with the transaction and the parties.
Similar to the UK position, special rules and regimes apply to certain categories of contracts such as employment and consumer contracts, which may impact the efficacy of the parties’ choice of law.
Are there any statutory provisions relating to force majeure?
How are force majeure clauses in commercial contracts applied and interpreted in practice?
English, Hong Kong SAR and Singapore law are common law systems and therefore apply a similar general approach to force majeure provisions in contracts. In particular, whether a force majeure clause applies in a given situation, and the consequences, will primarily depend on what the parties have agreed in the contract. The burden of proof is on the party wishing to exercise the force majeure clause to bring itself squarely within the clause by showing that the relevant event occurred and that it had (or was anticipated to have) the stipulated effect on the affected party’s contractual performance. The key points in analysing this are as follows:
(i) Assess whether the facts are within the scope of the wording of the force majeure clause. This has two main aspects:
First, whether the events are within those defined as triggering the clause. Taking the Covid-19-Outbreak as an example, whilst it may fall under the umbrella term of “pandemic”, the underlying cause of the disruption is likely to be more specific e.g. travel bans on employees, mandatory quarantine measures, shut-down of public services, exchanges, and money markets, etc. A comprehensive force majeure clause may list several of these events, affording the impacted party with an arsenal of arguments to explore. On the flipside, if the clause has been drafted in a more generic manner, it may not list any of these events specifically but contain broad catch-all language (e.g. “any other cause beyond [the Party’s] control”). Catch-all language of this nature may still be effective, but it gives rise to significantly more uncertainty and litigation risk for both parties
Second, is a measurement of disruption specified and is it met? For example, force majeure clauses sometimes provide that the triggering event must "prevent" performance, in which case the affected party will be expected to demonstrate that performance is legally or physically impossible, not just difficult or unprofitable (see e.g. Tennants (Lancashire) Ltd v G.S. Wilson & Co. Ltd  AC 495). By contrast, the words "hinder" and "delay" have a wider scope and might be satisfied where performance is substantially more onerous.
(ii) Even if the events do appear to fall within the scope of the clause, consider whether there are any other relevant contractual terms which impact on the operation of the clause. In particular, are there any requirements to notify the other party before relying on it? Or are there any particular exclusions to its scope?
(iii) The party seeking to rely on the force majeure is generally under a duty to show, on the balance of probabilities, that it has used all reasonable endeavours to avoid or circumvent the effects of the force majeure event (although, in this area, there may be overlap with the applicable contractual standards – particularly in a case where it is a requirement that performance has been “prevented”) (see e.g. Channel Island Ferries Ltd v Sealink  1 Lloyd’s Rep 323). Parties are therefore generally well advised to take appropriate measures to keep losses to a minimum and to put themselves in a position where they can demonstrate that they have done so.
(iv) What is the effect of the force majeure clause? This will be down to how the clause is worded. For example, does it permit the contract to be terminated, or does it excuse partial performance?
Finally, in any, limited, areas where the parties’ freedom to contract is regulated by statute it will be worth considering whether any such controls may impact on the operation of a force majeure clause. Examples under English, Hong Kong SAR and Singapore law would include certain provisions which, in cases of a B2B contract made on one party’s written standard terms, subject certain terms to a test of reasonableness (although note that international contracts will often be exempt from any potential application of these particular provisions).
In the absence of statutory provisions and / or contractual arrangements on force majeure, which instruments are available to avoid the performance of contractual obligations?
Under English, Hong Kong SAR and Singapore law, the main common law doctrine with potential relevance to the discharge of obligations in the light of unforeseen events is known as “frustration”. This, however, has a very limited scope. Its essential boundaries are as follows:
- Whilst the effect of a force majeure clause is primarily an exercise of contractual interpretation, frustration is a common law doctrine where a contract may be discharged upon the occurrence/non-occurrence of some unforeseeable supervening event which destroys the basis upon which that agreement was reached such that the agreement is brought to an end. The key conceptual difference between force majeure and frustration is that the former reflects the parties’ express intention on how to deal with supervening events and their consequences, whereas the latter is a relief imposed by law. Generally, frustration will not apply when the scenario has already been identified as part of a force majeure clause.
- Generally speaking, a frustrating event will satisfy the following characteristics: (i) it is an event that occurs after the contract has been formed, (ii) the event is beyond what was contemplated by the parties when they entered into the contract, and is so fundamental as to be going to the very essence of the contract, (iii) the event is not due to the fault of either party and not self-induced, and (iv) as a result of the event, performance of the contract has become impossible, illegal, or radically different from what was contemplated at the time the contract was entered into.
- It will be for the party relying on frustration to establish it and, in practice, it generally only applies in extreme scenarios (The Hannah Blumenthal  1 A.C. 584). The mere fact that an event deprives a party to a contract of benefits which were expected from its performance, or even renders performance physically impossible, might not necessitate that the doctrine of frustration can be used as an excuse for not performing, since a party may even be found to have taken the risk of such an eventuality, or undertaken an absolute promise to perform. In one recent example, the English court rejected an argument of frustration due to Brexit on the ground that that it only applies where the supervening event renders the performances of the parties’ bargain “radically different” (Canary Wharf (BP4) T1 Ltd v European Medicines Agency  EWHC 335 (Ch)).
- Where the doctrine of frustration applies, the contract is terminated automatically without any act/election of the parties. However, since the contract is only discharged prospectively, liability incurred up to the point of frustration might still attract disputes. This has, therefore, been an area of statutory intervention. As regards money already paid, subject to the contrary agreement of the parties, Hong Kong SAR statute provides a right to recover money paid in case of frustration or for compensation for partial performance before frustration under a contract governed by Hong Kong SAR law, however note that exceptions apply depending on the type of contract in question (Section 16 of the Law Amendment and Reform (Consolidation) Ordinance (Cap 23)). In the same vein, UK and Singapore statutes also offer similar relief (see Section (1)(2) of the Law Reform (Frustrated Contracts) Act 1943 and Section 2(2) of the Frustrated Contracts Act (Chapter 115), respectively).
Singapore: special regulations on Covid-19
The COVID-19 (Temporary Measures) Act 2020 (No. 14 of 2020) (the “Act”) and its subsidiary legislation, the COVID-19 (Temporary Measures) (Control Order) Regulations 2020 (“Control Order Regulations”), came into force on 7 April 2020. These legislative measures were enacted to mitigate the economic fallout from the effects of Covid-19, whilst allowing key corporate actions to continue and the wheels of justice to turn. It also introduces stringent laws to control the spread of the virus via movement control measures that impose restrictions on the rights and liberties of individuals.
The Act is a rare example of a piece of retroactive legislation passed by the Singapore Government. It applies to limited categories of contracts executed before 25 March 2020, in respect of performance expected on or after 1 February 2020. At present, the limited categories of contracts covered by the Act include:
- loan facilities granted by banks or finance companies that are (i) granted to a Singapore-incorporated entity which carries on business in Singapore, where at least 30% of shareholders are Singapore citizens or permanent residents, with an annual turnover (at group level) of no more than SGD 100 million in the latest financial year, and (ii) secured on commercial or industrial immovable property or plant, machinery or fixed assets used for manufacturing, production or other business purposes, located in Singapore;
- hire-purchase or conditional sales agreements over (i) plant, machinery or fixed assets used for manufacturing, production or other business purposes, located in Singapore, or (ii) commercial vehicles (e.g. goods vehicles, taxis, private hire cars);
- leases and licences for non-residential immovable property located in Singapore, such as commercial premises;
- construction contracts or contracts of supply for purposes of construction in Singapore;
- contracts for the provision of goods and services in relation to certain events in Singapore (such as weddings or conferences); and
- contracts relating to the Singapore tourism industry (such as cruises and hotel accommodation bookings but excluding air ticket contracts as these have refund policies which are generally standardised internationally amongst most air carriers).
The Act provides temporary relief to parties to “scheduled contracts” where they are unable to perform a contractual obligation due in material part to Covid-19 and have given notice in the prescribed form. In such cases, the counterparties are prevented from taking enforcement action against the notifying party and its guarantors or sureties in respect of the notifying party’s non-performance, including but not limited to the (i) termination of a lease of immovable property for failure to pay rent or other monies, (ii) commencement or continuation of legal proceedings (including arbitral proceedings under the Arbitration Act (Cap. 10)), (iii) enforcement of security over immovable property or movable property used for business purposes, a judgment or an arbitral award made under the Arbitration Act or an adjudication determination, (iv) exercise of certain self-help remedies such as repossession of goods used for business purposes, re-entry or forfeiture under a licence or lease of immovable property, and (v) insolvency action.
Outside of the limited circumstances described above, the general description of Singapore law in the sections above continue to apply.
What else needs to be considered by clients that are party to a contract which is affected by Covid-19?
Although, in analysing the effect of Covid-19 related disruption to contractual arrangements, much will depend upon the precise facts and circumstances, some basic steps and principles will remain relevant irrespective of whether a contract is governed by English, Hong Kong SAR or Singapore law. Which are of most concern to a party will depend on that party’s position; whether “innocent” or potentially in breach. In either case, however, a holistic view of the situation should be taken to understand the exact position. Key considerations will include:
(i) Review relevant contracts.
(ii) Consider which obligations are potentially affected/disrupted. Is there a potential breach and what are the consequences? For example:
- In general, a breach of contract carries with it an entitlement to damages, but there are limits. Under common law, loss is limited to that which would be in the ordinary course of things or within special circumstances known to the parties. If the relevant loss does not clearly fall within these categories, then there may be arguments that it is too “remote” (e.g., problems caused to onward contractual relationships by default of a supplier where a supplier knows nothing about them).
- Beyond damages, is the potential breach of a term which will provide a party with a right to terminate the contract? This may be express or, where not stated, because of the nature of the clause or even because of statute. In the context of delays, be particularly aware of clauses making “time of the essence” which generally have the consequence that a right to terminate will arise even if the delay is slight.
- Further, be aware of any more general express termination rights provided by the contract of other provisions (such as a material adverse change (“MAC”) clause) which might permit a party to avoid, or otherwise alter, the terms under the contract.
(iii) Consider what lines of defence may be available for a party potentially in breach. If there is potentially a breach of contract, a force majeure clause (and/or frustration) may, as discussed above, be the first port of call for a defendant because, if established, it is likely to be absolved of any breach per se. However, even if it cannot rely on those doctrines, that does not mean that there are no other defences that it can erect in the face of a claim. Again, this will depend on the facts and the contract in issue but examples might include:
- The existence of a limitation of liability/exclusion clause in the contract.
- In the event that there has been a dialogue between the parties as to the problem and the innocent party has made representations as to excused performance that have been relied upon, an estoppel may arise.
- Are there likely to be aspects of the claimant’s loss which it could have mitigated? In general, a claimant cannot recover loss caused by the other party’s breach that it could have taken reasonable steps to avoid. For example, where there is an available market on which the claimant could have obtained what was due to be supplied, it will normally be expected to take reasonable steps to obtain a replacement (See e.g. Golden Strait Corp v Nippon Yusen Kubishika Kaisha (The Golden Victory)  UKHL 12,  2 A.C. 353 at ). In the context of supply failures caused by Covid-19 disruption this may provide particularly fertile ground for argument.
Finally, beyond pure contractual analysis, other more practical steps should not be overlooked. For example:
- As should be apparent from the above, facts will be important to establish/defend any claim so it will be important to keep appropriate records of what has happened and of discussions with counterparties.
- Consider insurance coverage and whether any notifications thereunder are required.
- Consider whether any preventative steps can be taken (e.g. stockpiling/early delivery under contracts) and whether negotiated solutions are desirable/possible.
- Consider obtaining specialist legal advice to analyse/preserve your position as necessary.