If performance of a contract becomes more difficult or even impossible, then the general rule is that the party who fails to perform is liable in damages An exception to this is the doctrine of frustration. Lord Radcliffe in the House of Lords in the case of Davis Contractors v Fareham UDC said:

“ ... frustration occurs whenever the law recognises that, without default of either party, a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract... It was not this that I promised to do.”

As a historical note, the earliest case - Paradine v Jane dates from the English Civil War. The case involved a defence by a tenant that he could not pay rent because his lands had been taken over by Prince Rupert and his army. The court dismissed the defence. Whilst that might seem harsh, on a strict contractual view, the tenant’s performance of his obligations under the contract, i.e. the payment of rent, had not been affected by the supervening event - what had been affected was his enjoyment and use of the land. And that harsh approach has been followed by the courts today, especially when it comes to the suggestion that a contract has been frustrated because of economic difficulties. For example, here, Gold entered into a Development Agreement with BDW, whereby it was agreed that BDW would develop a substantial site in Surrey owned by Gold. BDW would build a large number of houses and flats and then sell the properties on long leases on behalf of Gold who would retain the freehold. The revenue generated by the sales would be split between Gold and BDW.

The works failed to commence in June 2008 as programmed and by October 2008 BDW reported that property prices in the area had dropped by at least 20%. This had a major impact on the sale value of the properties. BDW wrote to Gold stating that this would result in a significant loss in the event that the development went ahead and proposed that the build be delayed until a least December 2010. Gold did not accept this proposal and the parties were unable to come to any agreement as to the way forward. BDW said that the Agreement was void and unenforceable as the contract was frustrated owing to the fall in property market values which rendered performance impossible.

Gold commenced proceedings. Mr Justice Coulson concluded that the Agreement was not frustrated. It was clear that both parties foresaw the possibility that the property market would drop and the minimum prices would not be achieved. Indeed, not only was the event foreseen, but the Agreement made express provision for what should happen in the event that the minimum prices needed to be reduced. Thus, the event which occurred was something which the Agreement expressly contemplated and allowed for. If BDW considered that the properties would have to fetch a certain minimum price before it would be viable for them to commence the building works, then this should have been expressly set out in the terms of the contract.