The collapse of the property market has triggered a number of cases where buyers have sought to escape their contractual obligations. Many have tried to find loopholes in their contracts or to take advantage of delays or defaults by the other party. In Gold Group Properties Ltd v BDW Trading Ltd [2010] EWHC 323 (TCC); [2010] PLSCS 178, however, the developer claimed that the financial crisis was an unexpected supervening event that had frustrated a development agreement.
The developer took the view that it would be unable to sell the properties that it had agreed to construct for the minimum prices listed in its agreement with the landowner. It argued that this made it impossible to comply with its contractual obligations to construct and sell the properties and then divide the proceeds of sale with the landowner.
The judge was not impressed. He argued that developers run the risk of making a loss every time they take on a significant project. The parties in this case had foreseen that the property market might fall. In addition, the development agreement expressly permitted the parties to renegotiate the minimum prices.
The judge explained that the doctrine of frustration is not available to relieve contracting parties of imprudent commercial bargains. It operates within narrow confines, as the result of some extraneous event or change of situation that occurs without blame or fault being attributable to the party that seeks to rely on it.
This was not a case in which the subject matter of the agreement had exploded or been lost or some other unforeseen event had occurred, thus depriving both parties of the benefits of their agreement. Consequently, there was no reason for the law to intervene and dissolve the agreement. In truth, no supervening event had taken place.
What lessons can we learn from the case? With hindsight, it would have been helpful if the purpose of the schedule of minimum prices had been more clearly explained. Was it included in the development agreement: (i) to guarantee a minimum return to the landowner; (ii) as a condition precedent to the obligation to undertake the building work; or (iii) for the benefit of both parties? In the absence of contractual provisions confirming the position, the judge decided that the schedule was designed to apportion risk and benefit as between the parties.
The decision highlights the importance of contractual provisions that provide appropriate protection against changing market conditions, especially where the parties envisage a lengthy delay between exchange of contracts and completion. Would it have been possible to incorporate additional provisions enabling the developer to delay the project, or to terminate the development agreement before starting work in the event of an unexpected downturn in the market? Unfortunately, such provisions tend to be difficult to negotiate and often result in costly litigation when a contracting party seeks to rely on them. Perhaps, recent events will result in the wider use of conditions precedent, force majeure and other similar clauses that make specific reference to economic downturns.
Allyson Colby is a property law consultant
