Recession Not Frustrating - Legally Speaking

On Wednesday the Technology and Construction Court gave a judgment that is relevant to contracts said to be frustrated by the recession and thereby brought to an end.

The facts were as follows. In August 2007, shortly before the UK housing market took a downward turn, Barratt contracted with the freehold owner of a site, Gold, to build a large number of houses and flats ("the Development Agreement"). Once built, they were to be sold on long leases with Barratt and Gold sharing the proceeds.

Barratt was given vacant possession of the site in early 2008. However, it was advised that the minimum prices in the Development Agreement would not be achieved and as a result did not start work. Late last year Gold sued Barratt for approximately £9.5m in lost profits.

The judge rejected Barratt's defence that the minimum prices acted as a guaranteed minimum return or a condition precedent. Therefore Barratt breached the Agreement in failing to carry out the building works.

Of wider interest, the judge also held that the Agreement was not frustrated. A contract is frustrated by an event (without either party's default and for which the contract makes inadequate provision) which significantly changes the nature of the outstanding contractual duties. The change is so significant from what the parties could reasonably have contemplated when the contract was made that it would be unjust to hold them to it. In such a case the contract is immediately brought to an end and both parties are discharged from further performance. As this involves allowing parties to avoid performing their contractual duties, the courts are reluctant to find frustration.

The judge doubted that an "event" of frustration had occurred. There was no more than a forecast drop in property prices. Furthermore a drop had been foreseen when the Agreement was negotiated and allowed for in its terms. There was no injustice requiring the contract to be performed because the minimum prices could be renegotiated and both parties had an interest in making the Agreement work. As the Agreement was meant to last for two years a gloomy forecast during that period was not a frustrating event. In addition, Barratt could not say when the Agreement was frustrated. The judge asked rhetorically: how many of the properties had to drop below the forecast minimum prices? One, two, all of them? And for how long, given that the forecast prices fluctuated? The lack of clear answers to these questions militated...