The doctrine of frustration, land law, and responses to Covid-19

Author(s)

Barrister, 39 Essex Chambers; Part-time PhD student, Department of Land Economy, University of Cambridge

Posted

14 October 2020

Time to read

6 Minutes

The Covid-19 pandemic in 2020 has had a wide-ranging impact on the global economy. Many governments have enforced closures of certain types of business premises, such as restaurants and non-essential shops. Retail demand is dampened and supply chains have been damaged. Overall, the ability of landowners and leaseholders to make use of their land profitably has been suddenly diminished.

The abrupt emergence of a pandemic in 2020 might well be thought, at first blush, to be exactly the kind of ‘out of the blue’ situation where a doctrine of frustration would be engaged. Klaus Peter Berger and Daniel Behn have recently argued, in relation to doctrines of force majeure and hardship, that: “The COVID-19 pandemic provides the biggest conceivable litmus test for the viability and maturity of these important doctrines in modern times”. So far, however, the doctrine of frustration has had little effect on obligations arising out of land.

The British Institute of International and Comparative Law produced two Concept Notes on the effect of the pandemic on commercial contracts. The contributors to the first Concept Note asked, “is there is a case for adopting a more creative, graded, but nevertheless rigorous approach without prejudicing the underlying need for legal certainty?” In the second Concept Note, the authors argued that, “within the principle of legal certainty, new thinking is going to be required if the law is to play its full part in getting international commerce back on its feet”. Both Notes suggested that English law has something to learn from the more flexible response of civil law systems to unexpected events. Can, however, the English doctrine of frustration be usefully modified to provide this flexibility, especially in respect of obligations arising out of land?

This question goes beyond the situation at hand. Writing in 1941 about the Liabilities (War-Time Adjustment) Act 1941, Morris Finer and Manuel Harnik reflected in the Modern Law Review that, “the emergency statute offers excellent opportunities for the study of the techniques of law in action. The mischief to be remedied and the legal solutions adopted stand in striking juxtaposition.” The lessons that we can draw from legal responses to emergency situations can be used in future crises, such as those arising from potential future climate change or future pandemics. Such lessons can inform in the drafting of future agreements and legislation, as well as illuminating the operation of the doctrine of frustration itself.

The English law doctrine of frustration is engaged where the subject matter of the contract has been destroyed or is otherwise unavailable, it cannot be performed due to supervening illegality, or the parties have been deprived of their common commercial purpose. Other legal systems have also applied the doctrine where performance has become far more difficult or unprofitable then envisaged, but is still possible. For example, section § 2-615(a) of the US Uniform Commercial Code (‘UCC’) excuses a seller from their contractual obligations if they can establish that a contingency arose which made their performance impracticable, the non-occurrence of which was a basic assumption on which the contract was made.

In English law, a frustrating event discharges both parties from further performance automatically. By contrast, §313 of the German Civil Code (BGB) provides that if circumstances upon which the contract was based have materially changed after the conclusion of the contract, and if the parties would not have concluded the contract or would have done so upon different terms if they had foreseen that change, the court has the power to alter the terms of the contract. The doctrine of disturbance to the foundation of the contract (Störung der Geschäftsgrundlage) was initially excluded from the BGB when it was first enacted in 1900. The experience of hyperinflation following the First World War with its disastrous effects on contractual obligations, however, made the German judiciary receptive to this theory.

Following the House of Lords decision in National Carriers Ltd v Panalpina (Northern) Limited Ltd, it is now for the most part uncontroversial that the English doctrine of frustration potentially applies to agreements for obligations in respect of land. The doctrine is, however, hardly ever engaged, as demonstrated by Panalpina itself (where a ten-year commercial lease was not frustrated by its being inaccessible for 20 months) and Canary Wharf (BP4) T1 Ltd v European Medicines Agency (where Brexit did not frustrate the European Medicines Agency’s 25-year lease for its Canary Wharf headquarters).

A standard lease is not only a contract, but also an estate in land: the landlord’s principal obligation to vest an estate in land granting the tenant exclusive possession is executed once the tenant enters into possession: on this analysis, there is little left to be frustrated once this has taken place. Where the agreement is for the development of land, as opposed to simply for the grant or transfer of an interest in it, there is more scope for the doctrine of frustration to be invoked, as the nature of the performance required has been fundamentally changed by the frustrating event. For example, in Wong Lai Ying v Chinachem Investment Co Ltd, an agreement for the construction and sale of a tower block was held to be frustrated when a landslip destroyed the building and made the site unsafe.

Almost all agreements in relation to the development and use of land involve some level of risk, which is (either expressly or impliedly) allocated between the parties. The language of risk was explicitly used in the EMA Brexit case by Marcus Smith J. A tenant takes on the risk that they are able to pay the rent; each party to a lease takes on the risks associated with their repair covenants; a developer under a sale agreement with a building covenant takes on the risk that the development will be built on time and without actionable defects.

Development agreements, construction contracts and leases often contain numerous standard form terms allocating the risk of changes during the currency of the agreement: examples range from rent review clauses and price fluctuation clauses through to nuanced force majeure provisions. Any doctrine of frustration cuts across the risk allocation of the agreement in question. It is a safety-valve to relieve liability in exceptional circumstances when the parties have not foreseen the risks that they would otherwise have unwittingly assumed. As Gordon Chung has discussed, both the English and the German rules of frustration aim to arrive at a proper allocation of contractual risks in unusual circumstances that have not been foreseen or cannot be said to have been contractually allocated by the parties.

Different doctrines place the threshold for intervention in different places. Both English and German law, however, emphasise the high hurdle that needs to be surmounted before a finding that a long-term agreement for an interest in land is frustrated. In a series of German cases involving long-term contracts for the sale of land (with performance over a period of 99 years) the court took their long duration to be an assumption of the risk of changes in the economic environment. The persisting, long term, proprietary nature of rights in land is assumed to allocate the risks associated with the use of that land on the party acquiring it. Even if the English law of frustration were to be re-modelled so that it is capable of being triggered by impracticability, it is still unlikely that anything other than a short lease would be frustrated by an event such as Covid-19.

This analysis of risk allocation and frustration doctrines is a partial explanation of why many jurisdictions, including both Germany and England, have adopted emergency legislation to intervene directly into private land law relations as part of their overall packages in response to the Covid-19 pandemic in 2020. Temporary closures of premises and businesses, coupled with short to medium term economic disruption, are not likely to engage either the English doctrine of frustration or less strict hardship provisions found in other jurisdictions in respect of longer-term agreements for land.

Covid-19 related hardship is unlikely to engage frustration doctrines in respect of most substantial obligations arising out of land. The allocation of risk between parties under such agreements typically pushes the risk of temporary cessation of use, impracticability and hardship on to the tenant.

The problem for the future is how to deal with emergency situations causing extreme hardship which are unlikely to engage a doctrine of frustration. There are two answers. Firstly, agreements for obligations in respect of land should be drafted with an appreciation of such risk events, such as by incorporating tailored force majeure clauses or adapting non-insured risk provisions. Secondly, draft emergency legislation can be prepared now, with differing levels of responses depending on the nature of the emergency. When it comes to rare, but extreme, events, ‘hardly ever’ is not the same as ‘never’.

This blog entry is based on the paper “Intervening uncertainty in property relations and legal interventions into liability, remedies and enforcement: re-visiting the doctrine of frustration”, presented at the Society of Legal Scholars Annual Conference on 3 September 2020.

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How to cite this blog post (Harvard style)

Sawtell, D. (2020). The doctrine of frustration, land law, and responses to Covid-19. Available at: https://www.law.ox.ac.uk/research-and-subject-groups/property-law/blog/2020/10/doctrine-frustration-land-law-and-responses (Accessed [date]).