In the following case, which was bought before the courts by way of a summary application for judgement, the court had to consider whether the contract between the parties was frustrated so that performance become impossible or whether in fact one or other of the parties had wrongfully repudiated the contract.

Gold Group Properties Ltd v BDW Trading Ltd (formerly known as Barratt Homes Limited) [2010] EWHC 323 (TCC)

The relevant facts

The owner of a site in Whyteleafe, Surrey entered into a development agreement with a developer (the Development Agreement) under which it was agreed that:

  • the developer was responsible for building a large number of houses and flats (the Units) and selling the Units on behalf of the owner on long leases;
  • the owner and the developer were to share the revenue generated by the sales of the Units;
  • the developer was required to commence and proceed with the building works as soon as reasonably practicable and in any event within 12 weeks from the grant of vacant possession (1 March 2008) and complete the building works as soon as reasonably practicable but in any event within 30 months after the date of possession (1 January 2011); and
  • the developer was to carry out the works with due diligence.

Despite being given possession of the site the developer took few or no steps to commence the works. The developer returned the keys to the owner on 13 March 2009.

The developer’s claim

The developer argued that:

  • it was a condition precedent to the commencement and carrying out the works that the Units would fetch the minimum prices set out in Schedule 4 to the Development Agreement (the Minimum Prices);
  • it was advised that a fall in the property market would mean that the Minimum Prices would not be achieved;
  • therefore the developer was not obliged to commence work and/or the Development Agreement was frustrated; and
  • further, the owner was in breach of contract for failing to renegotiate the Minimum Prices.

The owner’s claim

Conversely, the owner argued that the Minimum Prices had been incorporated into the Development Agreement to protect the owner by providing it with a guaranteed minimum revenue stream. Accordingly, there was no justification for the developer’s wholesale refusal to commence the works.

The effect of the fall in the property market on the minimum price of the Units

At the time the developer’s works should have commenced in March 2008 the recession was beginning to bite which directly affected the developer’s business. However, at no time did the developer inform the owner that there were any problems with the proposed development or that there would be a problem with achieving the Minimum Prices for the Units. The developer first attended the site in the summer of 2008 and carried out very little or no work.

When the parties eventually met in November 2008, the developer reported that property prices had fallen by 20 per cent and that it was clear that sales of the Units would be below the Minimum Prices which would result in a loss making project. However, the developer did put forward an alternative set of payment terms for the sale of the Units. The owner rejected the proposed rearrangement and instead gave notice in December 2008 that the developer was in breach of its contractual obligations and required the breach to be remedied by 12 January 2009.

On 12 January 2009 the developer advised the owner that the contract was void and unenforceable on the basis that the Development Agreement had been discharged by frustration. The frustration had arisen because of the fall in property market values which had rendered performance of a fundamental part of the Development Agreement impossible as the parties would not be able to sell the Units at the Minimum Prices.

The owner rejected this claim in March 2009. Nothing else happened until 14 August 2009 when the owner wrote to the developer again identifying various breaches of contract.

The court’s approach to frustration of contracts

The starting point when considering whether a contract was frustrated was to consider the proper construction of the contract - Davis Contractors Limited v Fareham UDC [1956] AC 696 in which Lord Reid said:

“It appears to me that frustration depends, at least in most cases, not on adding any implied term, but on the true construction of the terms which are in the contract, read in light of the nature of the contract and of the relevant surrounding circumstances when the contract was made.”

Lord Reid followed the approach of Viscount Simon in British Movietone News Limited v London and District Cinemas Limited [1952] AC 166:

“If, on the other hand, a consideration of the terms of the contract, in the light of the circumstances existing when it was made, shows that they never agreed to be bound in a fundamentally different situation which has now unexpectedly emerged, the contract ceases to bind at that point - not because of the court in its discretion thinks it just and reasonable to qualify the terms of the contract, but because on its true construction it does not apply in that situation.”

For whose benefit were the minimum prices for?

On a proper construction of the Development Agreement the court did not agree with the owner’s claim that the benefit of the guaranteed Minimum Prices was solely for the owner’s benefit. On the contrary:

  • the Minimum Prices were designed to apportion benefit and risk equally between the owner and the developer;
  • the Minimum Prices were not fixed or set in stone or incapable of variation;
  • the owner could take advantage of rising house prices so as to obtain a greater recovery for the land by fixing its recovery to a share of the revenue as opposed to reference to a specific sum. Conversely house prices might reduce so recovery would be less;
  • the Minimum Prices could be reduced (or increased) by agreement between the parties; and
  • other terms of the Development Agreement provided for good faith and approval processes which reflected the reality that this was a complex and detailed arrangement which required co-operation between the parties in order for it to work.

Was the ability to realise the Minimum Prices a condition precedent to the developer commencing work?

The real question before the court was whether the developer was entitled not to carry out any building works because of a “concern” about the level of prices that might be realised at a future date, i.e. that the risk that the Minimum Price might not be achieved at some stage in the future could act as a condition precedent to the commencement of the works.

The Court held that such a term would be extremely unusual and would need to be very clearly articulated - the Development Agreement contained no such term.

Frustration: the legal principles

In Davis v Fareham (the leading case on frustration in the construction context) the House of Lords rejected the contention that the contract was frustrated. The relevant principle was identified as follows:

“… 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 which was undertaken by the contract … it was not this that I promised to do.”

The House of Lords restated the test for frustration in National Carriers Limited v Panalpina (Northern) Limited [1981] AC 675:

“Frustration of a contract takes place when there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances; in such case the law declares both parties to be discharged from further performance.”

The Courts have repeatedly said that the doctrine of frustration operates within narrow confines. In Pioneer Shipping Limited v BTP Tioxide Limited (The Nema) [1982] AC 724 it was stressed that frustration was - “not likely to be invoked to relieve contracting parties of the normal consequences of imprudent commercial bargains.”

Bingham J in J. Lauritzen AS v Wijsmuller BV (The Super Servant Two) [1990] 1 Lloyds’ Rep 1 identified various propositions necessary to establish frustration, the principle propositions being that:

  • frustration brought the contract to an immediate end;
  • because frustration operated to “kill the contract”, it was not to be lightly invoked; and
  • the essence of frustration was that it must be due to some outside event or extraneous change of situation.

The court had to consider whether the event was forseen or forseeable. The fact that the parties have foreseen the event but not made any provision for it in the contract will usually, not necessarily, prevent the doctrine of frustration from applying when the event occurs.

More recent Court of Appeal cases of frustration demonstrated that it is rare to find true instances of frustration.

Was the Development Agreement frustrated?

The developer argued that by no later than 12 January 2009 it was clear that the Units were unlikely to achieve the Minimum Prices, and since the fall in the property market was not the fault of either side it would be unjust to hold them to their literal obligations under the Development Agreement.

The Court found that the developer did not satisfy the legal test of frustration for the following reasons:

  • the parties expressly contemplated/foresaw the possibility that the property market would drop and that the Minimum Prices would not be achieved;
  • the Development Agreement made express provision for what would happen if that event occurred - i.e. the Minimum Prices would need to be reduced - the agreement remained capable of being performed;
  • there was no reason for the law to intervene and dissolve the contract - there was no injustice in this case which required the “drastic remedy of frustration” because the Minimum Prices could be renegotiated or fixed by the expert pursuant to the dispute resolution mechanism; and
  • there was no supervening event in this case - receipt of a gloomy forecast two years before the Units came onto the market was not “an event” in the proper sense of the word - it was not the happening of an event which could give rise to the frustration of the agreement.

Was the developer or the owner in breach of contract?

In the absence of frustration the court had to decide whether one or both of the parties were in breach of the terms of the Development Agreement and if so whether or not those breaches amounted to a repudiation of the agreement.

It was clear to the court that the developer was in breach of contract by 12 January 2009 (this was not ultimately disputed by the developer).

However, as to whether the owner was in breach of contract for failing to renegotiate the minimum prices under the Development Agreement, the court held that it was at least arguable that the owner’s refusal to come back with any financial counter-proposal of any sort, given the duty to act in good faith in the agreement, might constitute a breach of contract. A decision on this question would require further evidence.

The final question for the court was whether either of the parties were in repudiatory breach of contract and if so, whether that repudiation was accepted by the other party?

Repudiation: the legal principles

The court briefly set out the principles for repudiation:

  • If a breach of contract amounted to the manifestation of an intention on the part of the wrongdoer no longer to be bound by the terms of that contract, the breach will be treated as repudiatory and may be accepted as such by the innocent party.
  • Whether or not the breach would be regarded as repudiatory depended largely on the nature of the contractual term in issue and the nature and extent of the breach.
  • A failure of performance which constituted a breach of condition entitled the innocent party to treat himself as discharged from further liability (Chitty on Contracts, 30th ed, paras 12-025 and 24-040).
  • For repudiation, the breach must “go to the root of the contract” (Federal Commerce and Navigation Co. Ltd v Molena Alphas Inc. [1979] AC 757, 779.
  • The general rule was that the contract is not terminated until the innocent party accepts the repudiation, although an act of acceptance requires no particular form (Stocznia Gdanska SA v Latvian Shipping Co. [2002] 1 Lloyds’ Rep 436.

Did the developer repudiate the Agreement?

On the facts it appeared that the developer repudiated the Development Agreement no later than 12 January 2009 - they failed to comply with their critical obligations under the Development Agreement - to commence, carry out and complete the building works. These were conditions of the agreement (not just intermediate terms) and the developer’s failure to comply went to the “root of the contract”.

The court left open the possibility that the owner might also be in repudiatory breach of contract for failing to renegotiate the Minimum Prices with the developer.

Did the owner accept the developer’s repudiation?

The court held that although it was clear from 12 January 2009 that the developer was no longer prepared to work on site which would normally give rise to the clearest case of repudiation, the owner’s acceptance of that repudiation was less clear:

  • the owner did not reply to the developer’s letter of 12 January 2009;
  • when the owner did reply in March 2009 their response was equivocal - the letter required further examination against a factual background;
  • there were no details of a critical meeting between the parties in March 2009 - what was said during that meeting may be of critical relevance as to whether the repudiation by the developer was accepted or not by the owner; and
  • nothing happened for a further five months between the parties.

The court held that the events after 12 January 2009 were not clear enough for the court to give summary judgement on the owner’s repudiation claim.

Editors’ comments

This case is a useful reminder of how difficult it is to found a successful claim on frustration. As Bingham LJ made plain in Super Servant Two, frustration only arises at all “to give effect to the demands of justice, to achieve a just and reasonable result, to escape from injustice”. But there was no injustice in this case which required the drastic remedy of frustration.

Secondly, this case highlights the importance of the innocent party’s role in clearly accepting a repudiation of the contract by the wrongdoer. Although an act of acceptance of a repudiation requires no particular form, if the repudiation is not accepted and the innocent party elects to treat the contract as continuing, then it will remain in existence for the benefit of the wrongdoer as well as for the innocent party (Suisse Atlantique Societe d’Armement Martime SA v MV Rotterdamsche Kolen Centrale [1967] 1 AC 361). Acceptance of the repudiation by the owner was surprisingly unclear in this case.

View: Gold Group Properties Ltd v BDW Trading Ltd (formerly known as Barratt Homes Limited) [2010] EWHC 323 (TCC)