Frustration Of Purpose - Contract Law

[Sunny]

Hi,

A relative of mine bought an apartment off the plans in London about 15 months ago. He was recently contacted by the solicitor who was handling his legal work for him and a few other purchasers in the development. He said that a couple of other people were not now in a position to complete due to the fact that they had loan offers withdrawn and were looking at getting out the contract. The solicitor mentioned that there may be an argument to be made under this 'Fustration Of Purpose' concept as the lack of finance available due to the credit crunch could be seen as an unforseeable event that has fustrated the purpose of the contract and therefore obligations under the contract could be discharged.

He is looking for money if my relative has interest to get Opinion of Counsel. The cost would be split between all the buyers. My relative isn't going to do it as he wants to complete and has the financing but I was wondering if anyone knows anything about the concept. I hadn't heard about it before and I would imagine the chances of a successful argument are quiet slim.

 

[McCrack]

Frustration is certainly a vitiating factor that can act to terminate a contract but as you have pointed out it must be unforeseen by the party wanting to rely on it.
It can pleaded but without knowing the full circumstances I'd agree on the face it seems unlikely to be sucessful. The solicitor and/or Counsel dealing with the file would be better placed to advise.

 

[Askar]

The classic case for frustration is the burnt down hall case i.e. booking for a dance in a hall frustrated by hall burning down, so contract cannot be performed. I am not too sure it would have direct application to a house purchase, particularly where that property is available.

Afaik banks are continuing to lend but lending criteria has changed. While it might be foreseeable that purchaser would need finance (as happens in many purchases), it is not a requirement of every house purchase - unlike the example above, where existence of dance hall a prerequisite for dance to occur in the hall. Imo, legal certainty would require this doctrine to be narrowly applied.

To address the finance risk the contract is often made 'subject to loan approval'. If purchaser had such approval and signed the contract without this condition, and bank reneged subsequently, then probably need to consider right of action against bank. However, no UK bank has afaik reneged due to insolvency. If closing delayed and approval lapsed or drawdown conditions not capable of being satisfied this is arguably a foreseeable risk of any loan application, where contract unconditional. In addition, there is always a risk that lending criteria or personal circumstances will change at any time up to offer of loan, and this is an assumed risk by the purchaser who signs an unconditional contract for the purchase of a house.

This reminds me of a case in the House or Lords a couple of years ago. A party to a contract claimed force majeure (FM) when commodity prices went so high as to render performance by that party uneconomic. The party was unsuccssful in claiming that this event was unforeseeable and beyond its reasonable control to prevent, and therefore could not rely on the FM clause.

 

[Sunny]

Thanks for that. Thought it was grasping at straws alright. Might be an interesting argument to try and make though if you are desperate!