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

Abstract

Abstract: This article is a comparative analysis on the general frustration rule with reference to the two most interesting legal systems – Germany and Hong Kong. In Germany, the broad notion of Störung der Geschäftsgrundlage originated from its unique socio-economic background during the World Wars. Since its statutory codification on 1 January 2002, the doctrine has been praised as the most flexible and extensive solution to the problem of changed circumstances. Particularly, § 313 BGB welcomes judicial involvement in revising contractual terms. At least in a theoretical sense, the German model can be properly regarded as a highly ‘interventionist mechanism’. In Hong Kong, the pendulum has swung back too far to the other extreme. As the Hong Kong law on frustration was transplanted from the restrictive English model, the former largely operates within the narrow confines of supervening impossibility and essentially minimizes the role of judges who are given no power to fine-tune contractual obligations. In the light of this inflexible approach, the chances of succeeding in having a contract frustrated are very slim. However, against this discouraging trend, contracting parties have developed their own self-help strategies by incorporation of an appropriately drafted force majeure clause, a practice that tends to be the norm in most commercial dealings nowadays. This reflects a ‘hands-off approach’ of Hong Kong courts. The analysis here discloses that these two apparently dichotomous approaches, while representing two polar extremes in dealing with the problem of changed circumstances, actually yield the same result – a proper allocation of contractual risk. The author of this article will argue that, despite the apparent merits of the German model, the ‘hands-off approach’ suits the practical needs of Hong Kong and should be retained, particularly in view of the widespread use of force majeure clauses and the leniency shown by the courts in interpreting such clauses.