In this month’s potted guide, Jonathan Seitler QC guides practitioners through the basics of the law relating to getting out of bad bargains
Checklist
- How easy is it to get out of a bad bargain?
- When is a contract frustrated?
- Does the law of frustration apply to leases?
- How do you show that a lease has been frustrated?
- What are the situations in which a frustration will not occur?
- What is the effect of a frustration of a lease?
How easy is it to get out of a bad bargain?
The general rule in English law is that a party is stuck with its bargain. No matter how difficult it might be to carry on abiding by the terms of the contract which the parties have made, and no matter how unreasonable it might be for one party to expect the other to continue to abide by it in the face of a change in circumstances, once an agreement is made, the parties to it are expected to comply, until and unless it is terminated in accordance with its terms.
Furthermore, the modern trend is for the English courts to take a strict approach to contractual interpretation, emphasising that the language of a contract should be given its natural meaning and adopting a restrictive approach to implying terms.
In Arnold v Britton [2015] UKSC 36; [2015] EGLR 53, the Supreme Court emphasised the importance of the language of the contract and warned that the mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, is not a reason for departing from the natural language.
Similarly, in Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72; [2016] EGLR 8, the Supreme Court took a restrictive view of the circumstances in which a term will be implied into a contract, emphasising that the court should only intervene where the term is so obvious that it goes without saying or is necessary for business efficacy.
The fact that a term of a contract has turned out to be uncommercial does not, of itself, therefore mean that a term can be implied to modify its uncommercial effect.
The result of this is that, in general terms, parties will be bound tightly to the words of their contracts. There will be limited relief for those who have made a bad bargain: only if what makes the bargain bad can be fitted within the confines of a force majeure or material adverse change provision (both of which are not uncommon in leases) will there be any real hope of relief from within the four corners of the lease.
When is a contract frustrated?
In National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675, Lord Simon confirmed the test laid down in Davis Contractors Ltd v Fareham Urban District Council [1936] 696 for frustration in these terms:
“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.”
Does the law of frustration apply to leases?
Yes, probably. There is a (small amount of) precedent for the law of frustration being applied to leases. In National Carriers, the House of Lords accepted that the doctrine of frustration can apply to a lease in a rare case, although it did not apply on the facts of that case, where the only access road to the demised warehouse was to be closed, rendering the warehouse useless, for a period of around 20 months of a 10-year lease and it has not applied, so it seems, in any reported case in the period of more than 35 years since that case;
Having said that, the most famous case relating to the law of frustration – Krell v Henry [1903] 2 KB 740 – concerns an aspect of a property transaction where the defendant agreed to hire from the plaintiff a flat in Pall Mall for the days on which it had been announced that the King’s coronation processions would take place and pass along Pall Mall.
The contract contained no express reference to the coronation processions, or to any other purpose for which the flat was taken. A deposit was paid when the contract was entered into. The processions did not take place on those dates because the King had a head cold.
It was held that the taking place of the processions on the days originally fixed along the proclaimed route was regarded by both contracting parties as the essence of the contract and that therefore the plaintiff was not entitled to recover the balance of the rent fixed by the contract.
How do you show that a lease has been frustrated?
A lease will be frustrated if the party who seeks to treat the contract as frustrated can bring itself within the limited number of tightly drawn legal “gateways” which the law defines as frustrating events.
There are four such gateways. Each involves an event occurring subsequent to the making of the contract and which had been unforeseeable at that time, the effect of which is to radically alter the fundamental nature of the bargain which the parties made.
The first gateway is where continued performance is simply no longer possible. This is unlikely to arise in the case of leases: historically, the authorities in this gateway relate to sale of goods cases where the subject matter of the contract has been physically destroyed.
The second gateway is where the contract involves an element of personal service and the supervening event comprises a personal incapacity. This has tended to be limited to employment contracts.
The third gateway is where the supervening event makes further performance of the contract illegal: this would occur where, for instance, war breaks out and occupation under a lease is impossible. Pretty rare, one would hope.
The fourth gateway is the most “forgiving” and provides most scope in relation to leases: it arises where the supervening event radically increases the burdens on one of the parties without actually rendering performance impossible; see, for instance, Tsakiroglou v Noblee & Thorl GmbH [1962] AC 93.
What are the situations in which a frustration will not occur?
Four are particularly significant.
First, it is not enough, in particular under the fourth gateway, if the supervening event only makes performance more expensive for one party. This is an important and substantial limitation. A lease would not be frustrated simply because it becomes more difficult for the tenant to occupy or pay its rent. The supervening event must radically change the contract’s fundamentals. Changes in economic conditions, for instance involving a fall in property values, will not be enough.
Second, it will be difficult, if not impossible to allege that a supervening event should frustrate the contract if it cannot have been completely unforeseen because the contract, properly construed, includes procedures which are meant to respond to the occurrence of just such an event: see, for example, Gold Group Properties Ltd v BDW Trading Ltd [2010] EWHC 1632 (TCC); [2010] PLSCS 189.
Third, even if not expressly provided for, if the supervening event is something which the parties really ought to have provided for, its happening is unlikely to frustrate the contract: see Armchair Answercall Ltd v People in Mind Ltd [2016] EWCA Civ 1039.
The fourth restriction is that a supervening event cannot frustrate a contract if the coming about of that event is the fault of one of the parties, either factually or legally, such as where a seller cannot supply its goods because its own supplier has failed to supply them but the seller is liable in law for such default, as in CTI Group Inc v Transclear SA [2008] EWCA Civ 856.
What is the effect of a frustration of a lease?
The effect of a frustration depends on whether the Law Reform (Frustrated Contracts) Act 1943 (the 1943 Act) applies.
Where the 1943 Act does not apply, unless there is a total failure of consideration, the loss will lie where it falls. If any consideration at all has been given, that will be the result: see Chandler v Webster [1904] 1 KB 493. The contract will be treated as over, with neither party thereafter liable to do anything pursuant to its terms. Neither can any party sue the other for damages. All claims fall away: see Appleby v Myers [1867] LR 2 CP 651.
Where the 1943 Act applies (which it would, in the case of a lease), sums paid which fell due before the frustrating event occurred can be recovered back, though an amount can be retained by the party holding it to cover its expenses.
Furthermore, it is also possible for the court to order a party who obtained a valuable benefit under the contract before the occurrence of the frustrating event to pay such sum for that valuable benefit as is “just”.
This statutory intervention helps to dull any particularly harsh effect of the contract’s frustration.
