Frustration and Material Adverse Change - The Secret to Avoiding Contracts in Troubled Times?

When economic conditions deteriorate, some parties inevitably find compliance with their contractual commitments more difficult. But can a party avoid its obligations on the basis that performance has become more expensive or onerous as a result of the economic climate? Or can a party get out of a contact on the grounds that economic circumstances have compromised its counterparty's future ability to perform, even though it has not yet actually failed to perform?

The English courts have always been reluctant to let a party avoid the consequences of an imprudent commercial deal and will seek to hold parties to their agreement even where the fulfilment of their obligations has become more expensive or onerous. A recent example is the case of Gold Group Properties Ltd v BDW Trading Ltd [2010] EWHC 323 (TCC). This involved an attempt by BDW to avoid a contract by relying on deterioration of the property market as a frustrating event automatically discharging the contract and releasing the parties from their obligations.

Freehold owner Gold and property developer BDW had agreed that BDW would develop a site by building houses and flats, which would then be sold on long leases with the revenue generated shared by Gold and BDW. A schedule to the development agreement set out minimum prices for the units constructed.

In its defence to Gold's application for summary judgment, BDW argued that they had received advice that the minimum prices would not be achieved, due to a fall in the property market, and the contract was therefore frustrated because the fall was the fault of neither party and so it would be unjust to hold the parties to their literal obligations under the development agreement. Although Mr Justice Coulson allowed the claim to continue to trial on other grounds, he found against BDW on this point, holding that:

Both Gold and BDW foresaw a fall in the property market, even if such an event was unexpected; The development agreement set out a mechanism for a reduction in the minimum prices, either by agreement between the parties or by expert determination; There was therefore no injustice to the parties; and There was no true frustrating event: there was no evidence that minimum prices would definitely not be achieved, merely a gloomy forecast as to what prices might be achieved on future sales (which would not occur for at least two years). However, parties can seek to protect themselves from performance difficulties which might result...