Scottish Court of Session Decisions

Pursuers: N. E. Beynon, advocate; Biggart Baillie LLP

Defenders: R. W. Dunlop, advocate; Maclay Murray & Spens

27 February 2009

[1] The pursuers in February 2006 entered into a lease of approximately 1.75 hectares of land on Baird Road about 300 metres to the north of Ratho village, near Edinburgh. The land had previously been used as a concrete batching plant. The lease was for a period of five years at an annual rental of £45,000. In entering into the lease, the pursuers intended to use the site for recycling and storing bulk road materials and they aver that the defenders, who are the landlords, similarly envisaged that use. As a result of the service of an enforcement notice by the planning authority and the pursuers' failure on an appeal against that notice, the pursuers aver that they can neither store nor recycle bulk materials on the site. They seek declarator that they are no longer obliged to fulfil the tenants' obligations under the lease. In support of that conclusion they aver that the lease has been frustrated and separately that the lease is void for illegality. The pursuers also seek repayment of the rent which they have paid since the adverse appeal decision. In a procedure roll debate the defenders challenged the relevancy of the pursuers' pleadings and sought dismissal of the action.

[2] The factual background revealed in the pursuers' averments and the documents to which I was referred may be summarised as follows. The site was used as a concrete batching plant from some time between 1955 and 1960 until 1998. The defenders purchased it in 2001 and let it intermittently on short term lets to various building firms for miscellaneous storage purposes. In 2006 there were several hundreds of tonnes of rubble on the site and the defenders asked the pursuers to recycle the rubble when the pursuers took the lease of the site. The pursuers did so. The pursuers aver that the defenders knew that the pursuers intended to recycle construction and demolition materials on the site, using heavy plant and mobile crushing units. The defenders' agents, Rydens, sent the pursuers a copy of a planning consent dated 1990 which permitted storage on part of the site and told them of their belief, which they did not warrant, that industrial use was also permitted. In terms of the Town and Country Planning (Use Classes) (Scotland) Order 1997 (SI 1997/3061) class 5 is general industrial use which is use for the carrying on of an industrial process other than one falling within class 4 (business) and class 6 is storage or distribution which is defined as use for storage or as a distribution centre.

[3] The relevant clauses of the lease were the following. Clause 3 provided that the lease would endure from 18 January 2006 until 17 January 2011. It also provided for the earlier termination of the lease by notice on the occurrence of either of two events, namely (a) the acquisition of the access roadway by the local authority under a compulsory purchase order and (b) the destruction of or material damage to the premises. Clause 4 provided that the rent would be £45,000 per year. Clause 5.10 prohibited the tenants from doing anything which would contravene statutory provisions which included the Planning Acts and clause 5.12 required the tenants to apply at their own cost for all licences, consents and permissions for alteration of the premises. The user clause, which was clause 5.14, was in these terms:

[4] Although the user clause in the lease referred only to the storage of bulk road materials, the pursuers installed heavy plant and crushers to recycle such material. Noise and dust from their operations gave rise to complaints from neighbouring proprietors. Within about two weeks after the lease was signed, the planning authority, the City of Edinburgh Council, served a planning contravention notice dated 28 February 2006 on the defenders alleging that the use of the site for the recycling of construction and demolition materials with associated plant and ancillary facilities was a breach of planning control. The planning authority then served an enforcement notice dated 5 September 2006 on both the pursuers and the defenders. The enforcement notice ordered them to cease to use the site for the recycling of construction and demolition materials and to remove all plant and materials from the site within two months of 12 October 2006.

[5] The pursuers, with at least the tacit support of the defenders, appealed against the enforcement notice. That appeal was not successful. On 27 March 2007 Mr Douglas G Hope, the planning reporter, issued his decision letter, in which he dismissed the appeal and upheld the enforcement notice but varied the time allowed for compliance from two months to four months. His decision related to the Class 5 use of the site. He held that the former industrial use had been abandoned in 1998 and that the short term tenants of the site between 2001 and 2005 had used it intermittently for storage which was a different use class in the Use Classes Order. He therefore held that planning permission was needed. He went on to consider the relevant planning policies and the adverse impacts of the proposed use, and, in particular, landscape impact, noise, dust and heavy lorry movements, and concluded that planning permission should not be given. While Mr Hope's decision did not determine whether there was an extant permission for use of the site or part of it for storage, it was clear from the reporter's summary of the Council's submission that the Council's position was that there was no such permission. The pursuers aver that they have no prospects of obtaining planning consent for class 6 use.

[6] The pursuers' case is thus that, as a result of the decision of the reporter in the class 5 appeal and the attitude of the planning authority in relation to class 6 use, they cannot use the site either for the recycling of the construction and demolition material or, in accordance with the user clause of the lease, for the storage of that material.

[7] I summarise briefly the pursuers' submissions in relation to frustration and secondly in relation to illegality. In relation to the proposition that the lease had been frustrated Mr Beynon submitted that the reporter's decision and the stance taken by the local planning authority amounted to a supervening event which rendered illegal the only use of the site which was permitted under the lease. This event had occurred without any fault on the part of the pursuers. Both of the parties to the lease had envisaged the industrial use of the site and it could be inferred that the defenders would have consented to such use as they had encouraged it in relation to the disposal of their rubble on the site. The pursuers were offering to prove that they had neither class 5 or class 6 consents and had no prospects of obtaining them. While the reporter had referred to nuisance caused to neighbours, it was not possible without inquiry to determine whether the noise and dust from the operations amounted to a breach by the pursuers of the prohibition against causing nuisance in clause 5.15 of the lease. He submitted that the lease had not made sufficient provision for the circumstances which had occurred as the landlords could not enforce the user obligation to require the pursuers to store materials on the site as that would require the pursuers to act illegally. The court would not grant specific implement in those circumstances. Thus the attitude of the planning authorities had brought about a significant change of circumstances which the parties had not contemplated when they entered into the lease. If those submissions were not upheld, he submitted in the alternative that the lease was void from the outset as the pursuers were required by clause 5.14 to use the site for purposes which amounted to a breach of planning law. The pursuers had pleaded a relevant case for enquiry.

[8] Mr Dunlop on behalf of the defenders invited the court to dismiss the action on the basis that no relevant case of frustration of contract or of illegality had been pleaded.

[9] In the course of the debate counsel referred to the following authorities. On the issue of frustration of contract Mr Dunlop referred to Cricklewood Property and Investment Trust Ltd v Leighton's Investment Trust Ltd [1945] AC 221, James B. Fraser & Co v Denny Mott & Dickson Ltd 1944 SC (HL) 35, Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696, National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675, J Lauritzen AS v Wijsmuller BV (The "Superservant Two") [1990] 1 Lloyd's Rep 1, Chitty on Contracts (30^th ed) paragraphs 23.58-23.60, Hart's Trustees v Arrol (1903) 6 F 36 and Amalgamated Investment & Property Co Ltd v John Walker & Sons Ltd [1977] 1 WLR 164. On illegality Mr Dunlop referred to Archbolds (Freightage) Ltd v S. Spanglett Ltd [1961] 1 QB 374 and Union Totaliser Co Ltd v Scott 1951 SLT (Notes) 5. Mr Beynon in his submissions on frustration, as well discussing the cases mentioned above, referred to Gamerco SA v I.C.M./Fair Warning (Agency) Ltd [1995] 1 WLR 1226 and McBryde, The Law of Contract in Scotland (3^rd ed), chapter 8 on the construction of contracts and paragraph 23.18 on specific implement. On the issue of illegality he referred to Dowling & Rutter v Abacus Frozen Foods Ltd 2002 SLT 491.

Discussion

[10] The argument in this case turns principally on the scope of the law of frustration. The defenders' submission on this issue is that the action is irrelevant because the pursuers do not plead a case which falls within the doctrine of frustration. It may be helpful therefore to start by summarising the law so far as it is relevant to this case.

[11] The modern doctrine of frustration has its origin in English law in the mid-nineteenth century. In Taylor v Caldwell (1863) 3 B & S 826 Blackburn J, drawing on the civil law, applied the principle of frustration to a claim for damages by plaintiffs who had contracted to have the use of a music hall which thereafter had been destroyed by fire. In Scots law the doctrine made an appearance in its modern form in Guthrie's edition of Bell's Principles (10^th ed (1899) s.29) in the following terms:

[12] The law now identifies frustration by construing the contract in the light of the circumstances which existed when it was made and comparing the nature of the obligations which arose then with the nature of the obligations arising in the new circumstances. In Davis Contractors Limited v Fareham Urban District Council [1956] AC 696 Lord Radcliffe at p.729 formulated the classic statement of the modern doctrine:

"Frustration occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. Non haec in foedera veni. It was not this that I promised to do".

In that case Lord Reid at p.721 emphasised the importance of construing the contract and stated that:

"The question is whether the contract which they did make is, on its true construction, wide enough to apply to the new situation: if it is not then it is at an end."

The House of Lords have repeated these statements in subsequent cases and Bingham LJ (as he then was) in the Court of Appeal having quoted these passages from the speeches in Davis Contractors Ltd helpfully set out five propositions which are relevant to the doctrine. It appears to me that the scope of the doctrine is substantially the same in Scotland and England as Lord MacMillan stated in James Fraser & Company Limited v Denny Mott & Dickson 1944 SC (HL) 35 at p.41 and as the House of Lords in Davis Contractors Ltd drew no distinction between the two jurisdictions and drew on the Scottish case of James Fraser & Company Limited in their discussion of English law.

[13] Bearing in mind Lord Radcliffe's classic statement and Lord Reid's approach which I have quoted in the preceding paragraph, I seek to summarise the law in the following propositions. The first five are or include quotations from Bingham LJ's propositions in J Lauritzen AS v Wijsmuller BV [1990] 1 Lloyds Rep 1, at p.8 which he supported by reference to authority. First:

"The doctrine of frustration was evolved to mitigate the rigour of the common law's insistence on literal performance of absolute promises. ... The object of the doctrine was to give effect to the demands of justice, to achieve a just and reasonable result, to do what was reasonable and fair, as an expedient to escape from injustice where such would result from enforcement of a contract in its literal terms after a significant change in circumstances".

Secondly:

"Since the effect of frustration is to kill the contract and discharge the parties from further liability under it, the doctrine is not to be lightly invoked, but must be kept within very narrow limits and ought not to be extended".

Thirdly, "frustration brings the contract to an end forthwith, without more and automatically". Thus in Lauritzen frustration was excluded among other reasons by the fact that after the loss of the Superservant II the defendants re-arranged the schedule of their other semi-submersible barge to take on one of the lost barge's contracts before informing the plaintiff oil rig owners that they could not honour their contract. It was not the loss of the Superservant II which prevented the defendants from performing their contract but their decision on the use of their other barge. Fourthly,

"the essence of frustration is that it should not be due to the act or election of the party seeking to rely on it. ... A frustrating event must be some outside event or extraneous change".

Fifthly, "a frustrating event must take place without blame or fault on the side of the party seeking to rely on it". In Lauritzen Bingham LJ (at p.10) interpreted "fault" not by reference to any legal duty but by asking whether the person seeking to rely on the event had had the means and opportunity to prevent it but nevertheless had caused or permitted it to come about. The fourth and fifth propositions are generally consistent with Gloag on Contract (2^nd ed) at p.346, in which the absence of fault was equated with the supervening impossibility having arisen from circumstances beyond the control of either of the parties, and with Professor McBryde's "The Law of Contract in Scotland" (3^rd ed) at paragraphs 21.38 to 21.43 in which he states that the event must be beyond the control of the person who seeks to rely on it.

[14] I would add the following propositions. Sixthly, as Viscount Simonds and Lord Radcliffe stated in Davis Contractors Ltd at pp.716 and 729 respectively it is not sufficient of itself that a change of circumstances renders performance of the contractual obligations more expensive or onerous or thereby causes hardship. The supervening event or circumstances must have rendered performance impossible or fundamentally different from what, on an objective construction of the contract, the parties contemplated when they contracted. See also National Carriers Limited v Panalpina (Northern) Limited [1981] AC 675, Lord Simon of Glaisdale at p.700 F-G which I quote in paragraph 15 below and at p.707 B. Seventhly, if the parties have foreseen the event and made provision for it, that would generally exclude the doctrine of frustration as, in Lord Reid's words in Davis Contractors Ltd at p.721 the contract would be wide enough to apply to the new situation. Similarly if the event had been foreseen and parties had not provided for it in their contract, that would usually prevent the doctrine from applying on the occurrence of the event: Davis Contractors Ltd at p.731 and Chitty, paragraph 23.059. But circumstances may arise where parties have been aware of the possibility of an event occurring but have not made any or sufficient provision for the risk and justice requires the application of the doctrine: National Carriers Ltd, Lord Roskill at p. 712 F. See also Chitty para. 23.057. Finally, frustration relieves parties from further performance of their obligations under the contract. Accrued rights are preserved. In Scotland the law of unjustified enrichment is available in appropriate cases to give a remedy to enrichment at another's loss as a consequence of the frustration. This is relevant to the pursuers' claim for repayment of rent paid. Whether the court has a wider power to apportion losses between the parties is a matter of academic controversy.

[15] In this case parties accepted that the doctrine of frustration could apply to leases: National Carriers Ltd. Mr Dunlop derived the structure of his submission from Lord Simon of Glaisdale's description of frustration in National Carriers Ltd at p.700 F-G where he stated:

[16] In my opinion there is in this case no supervening event on which to ground the assertion that performance has been frustrated. The attitude of the planning authorities is not a relevant event. The reporter in his findings looked at circumstances as they existed before the parties entered into the lease as the background to the enforcement notice and held that planning permission was needed for industrial use. Thus at the start of the lease and thereafter the parties did not have planning permission for such use. While it is clear from his recording of the Council's submissions that the Council's stance was that there was no extant permission for class 6 use, I do not construe his report as expressing any conclusion on the existence of permission for such use. Even if he had concluded that there was no permission for class 6 use, that conclusion would apply to the circumstances as they existed at the start of the lease as well as at the date of his decision. The absence of planning permission for the intended use predated the lease.

[17] I consider that Gamerco SA, in which Garland J treated the public authorities' ban on the use of an unsafe stadium as a supervening event which frustrated a contract for the performance of a rock concert, falls to be distinguished from the circumstances of this case. While it appears that the stadium was potentially unsafe before the contract was made because high alumina cement had been used in its construction, its use was not illegal until the ban was imposed.

[18] The absence of a supervening event is of itself sufficient to determine the relevancy of the frustration argument. Nonetheless, I comment briefly on the other points which the defenders argued. If the attitude of the planning authorities had been a supervening event, I am not persuaded that I could determine as a matter of relevancy without enquiry into the facts that the event arose through the fault of the pursuers in the sense that it was something within their control. In particular I cannot give effect to the defenders' assertion that the pursuers acted in breach of the user clause and caused a nuisance without hearing evidence on those matters and also considering any evidence which supported the pursuers' averment that the defenders intended that the site be used in the way in which the pursuers used it. Thus, interpreting fault in the way in which Bingham LJ did in Lauritzen, I cannot hold as a matter of relevancy that the pursuers had the opportunity and means to prevent the planning authorities from taking the attitude which they did but nevertheless caused them to take that attitude.

[19] I consider that the contract made provision for the possible absence of a relevant planning permission by allocating that risk to the pursuers. Clause 6.6 addressed the possible absence of such permission and excluded any warranty by the landlords. Clause 5.12 imposed on the pursuers the obligation to obtain the necessary permissions and clause 5.14 created a mechanism by which the pursuers could obtain the landlords' permission for alternative use. Looking objectively at the terms of the lease in the context of the circumstances revealed in the pleadings and documents, I am satisfied that the parties are to be taken as having foreseen the possibility that there was no relevant planning permission and as having agreed who would bear the risk of that being so. While the reporter's decision and the Council's attitude may have come as an unpleasant surprise to the pursuers, I am not persuaded that on an objective interpretation of the lease it amounted to a significant change from what the parties had contemplated. I have considerable sympathy for the pursuers as they appear to have onerous rental obligations and no obvious use of the site which will generate sufficient income to support the rent. But it appears to me that the pursuers took the risk that there was no relevant planning permission and have made an imprudent deal. As they undertook that risk, the nature of their obligations have not changed significantly. The doctrine of frustration, which Bingham LJ and other judges have said must be kept within very narrow limits, does not release contracting parties from their obligations in such circumstances.

[20] The alternative case of illegality was concerned not with supervening events but illegality ab initio. The flaw in that case is clause 5.14, which creates a mechanism by which the pursuers can use the site legally by applying to the landlords for approval for a use which is authorised under planning legislation. As Devlin LJ stated in Archbolds (Freightage) Limited v S. Spanglett Limited [1961] 1 QB 374 at p.391, "it is a familiar principle of law that if a contract can be performed in one of two ways, that is, legally or illegally, it is not an illegal contract". This contract can be so performed. I am therefore satisfied that the alternative case of illegality is also irrelevant.

[21] As I am satisfied that the pursuers' pleadings are irrelevant to support the declarator which they seek, I sustain the defenders' first plea in law and dismiss the action.