A Comparative Analysis of the Frustration Rule: Possibility of Reconciliation Between Hong Kong-English ‘Hands-off Approach’ and German ‘Interventionist Mechanism’

In a recent paper of mine, I conduct a comparative analysis on the general frustration rule with reference to two legal systems – Germany and Hong Kong. When considering how to deal with changed circumstances under contract law, we find Germany and Hong Kong veering toward two different extremes: judicial intervention versus self-help. But despite this theoretical difference, they represent two opposite and equally effective means to the same end.

The German doctrine of Störung der Geschäftsgrundlage, statutorily codified on 1 January 2002, owes its origin to the unique socio-economic background during the two World Wars. The German model embraces judicial modification of contracts, representing the most flexible and extensive solution to the problem of changed circumstances. By attributing a social function to private obligations, the German approach is highly ‘interventionist’ in the sense that adjudicators are equipped with a bundle of tools, including § 275(2) and § 313 BGB, in coping with unforeseen supervening events. Being entrusted with the role of a ‘final guardian’ of contractual relationships, the German judges are perfectly entitled to fine-tune contractual obligations in order to keep a contract alive, after examining the circumstances of a particular case. Without eroding the pacta sunt servanda principle, the judge will only exercise this discretion in appropriate circumstances in conformity with the overriding contractual principle of good faith. In addition, due to the rarity of using force majeure clauses in a system of fault-based civil liability, such as Germany, the task of risk allocation is effectively assigned to the judiciary that plays the pivotal role of a ‘moderator’ in contractual disputes. 

It is worth noting that the German mechanism contrasts remarkably with the Hong Kong doctrine of frustration, which was largely transplanted from the restrictive English model and thus operates within the narrow confines of supervening impossibility, with almost no room for judicial creativity. Although the German ‘interventionist mechanism’ has its theoretical and practical merits, it seemingly runs counter to the very nature of a contract under a capitalist market model. In England, contracts are generally regarded as instruments of private autonomy and they are essentially considered to be ex ante efficient. In other words, the risk of a contract becoming more difficult, or financially onerous, to perform is one, which the parties mutually accept at the time of contract formation. Furthermore, under the Hong Kong-English law, there is an absence of a general duty of good faith, which serves as the cornerstone of the German ‘interventionist mechanism’. More importantly, in reality, the Hong Kong-English law mechanism can be a very costly solution in terms of the uncertainties arising out of increased litigation. Particularly in the light of the long-standing strict attitude of Hong Kong-English judges as well as their inexperience in restoring a just contractual equilibrium through equity, these uncertainties would very likely be intensified. 

It follows that a narrow doctrine of frustration can, at the very least, provide certainty in an area of law that is wrought with uncertainties. Notably, this certainty, while preventing contracting parties from placing undue reliance on the court, indirectly incentivises them to rely on self-help solutions. This so-called ‘hands-off approach’ represents an alternative avenue that better suits the needs of the contracting parties in Hong Kong, who tend to be more vigilant in safeguarding their rights and interests by incorporation of a well-drafted force majeure clause, particularly in view of the leniency displayed by the court in interpreting these kinds of clauses. Indeed, one must bear in mind that the parties themselves are always in the best position to guard against future contingencies through the insertion of contractual terms and conditions tailored to their special needs.

While there is no imminent need for reform in Hong Kong, we should instead advise contracting parties as to how they can design an appropriately drafted force majeure clause that caters for their practical needs. Such a clause ought to specify matters including the definition of the supervening event, obligations as to reporting, the effect of the event and the question of adjudication. With such steps being taken, contracting parties in Hong Kong would be afforded sufficient protection in their commercial dealings under the ‘hands-off approach’.

Gordon Chung is a final year law student at the City University of Hong Kong.