National Carriers Ltd v Panalpina (Northern) Ltd

The doctrine of frustration can apply to a lease, although successful cases will be exceedingly rare. A leasehold estate does not place the transaction outside the law of contract.

Frustration arises where an event, occurring without either party's default and not sufficiently provided for, makes outstanding performance radically different from that undertaken. For a lease, the court must consider its terms, contemplated use, allocation of risk, the duration of the interruption and the unexpired term. A temporary loss of use which leaves a substantial period of the lease to run will ordinarily be insufficient. The question is assessed from the reasonable probabilities existing when the alleged frustrating event occurred.

National Carriers Ltd v Panalpina (Northern) Ltd concerned a ten-year lease of a purpose-built warehouse. Its only access was through Kingston Street. The street was closed in May 1979 because a dangerous listed building opposite awaited demolition, leaving the warehouse unusable for its permitted purpose for about 20 months.

The landlord claimed unpaid rent. The tenant pleaded that the lease had been discharged by frustration. Master Waldman granted summary judgment, and Sheen J dismissed the tenant's appeal because the courts below were bound by Leighton's Investment Trust Ltd v Cricklewood Property and Investment Trust Ltd [1943] K.B. 493. Sheen J certified a leapfrog appeal under section 12 of the Administration of Justice Act 1969.

The House considered whether frustration could ever determine a lease and, if so, whether the temporary closure raised a triable defence to the rent claim.

1. Disposition. The appeal was dismissed unanimously. The High Court's order granting summary judgment for the landlord was affirmed, and the tenant was ordered to pay the costs of the appeal. All five Law Lords concluded that the facts disclosed no triable issue of frustration.

2. Frustration may apply to leases. Lord Hailsham LC, Lord Wilberforce, Lord Simon of Glaisdale and Lord Roskill held that no rule of principle made leases inherently incapable of frustration. A lease is both a contract and a grant of an estate in land. The existence of that estate is important when frustration is assessed, but it does not create an absolute exclusion from the doctrine.

   The majority preferred the reasoning of Viscount Simon and Lord Wright in Cricklewood Property and Investment Trust Ltd v Leightons Investment Trust Ltd [1945] A.C. 221. It rejected the competing view that a lease could never be frustrated. The Court of Appeal's categorical contrary approach in Leighton's Investment Trust Ltd v Cricklewood Property and Investment Trust Ltd [1943] K.B. 493 could no longer stand. Lord Russell of Killowen accepted possible frustration where a lease was merely incidental to a wider commercial adventure, but otherwise maintained a narrower view.

3. The governing inquiry. Lord Hailsham adopted Lord Radcliffe's formulation in Davis Contractors Ltd v Fareham U.D.C. [1956] A.C. 696. Performance must have become radically different from that undertaken. Lord Simon stated that the event must occur without default, lack sufficient contractual provision, and significantly change the outstanding rights or obligations beyond what the parties could reasonably have contemplated, so that literal enforcement would be unjust.

   Lord Wilberforce emphasised the terms of the lease, its foundation, the surrounding circumstances and any special rules applicable to leases. The court should consider the contemplated use, restrictions on use, allocation of risk, the likely duration of the interruption and the remaining term. Although available in principle, frustration of a lease will be exceedingly rare. If it occurs, the Law Reform (Frustrated Contracts) Act 1943 may require consideration.

4. Application. The interruption did not approach the gravity required for frustration. Fewer than two years of use would be lost from a ten-year term, and nearly three years would remain after access was restored. The rent covenant was unconditional except for an express suspension following fire. Considerable expense, inconvenience and business disruption did not make the remaining performance radically different.

   Per Lord Simon, the question was assessed from the reasonable commercial probabilities existing when the road closed. On those probabilities, and even taking the subsequent 20-month duration in the tenant's favour, enforcement of the lease remained consistent with the parties' bargain.

• House of Lords: In National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675, the House unanimously dismissed the tenant's appeal and affirmed the High Court order. By a majority of four to one, it held that frustration was capable in principle of determining a lease.
• High Court, Queen's Bench Division: Sheen J dismissed the appeal from Master Waldman on 16 October 1979. Bound by the Court of Appeal authority, he certified a leapfrog appeal under section 12 of the Administration of Justice Act 1969.
• Master: Master Waldman granted the landlord summary judgment for the unpaid rent under RSC Order 14, holding that the pleaded defence was unavailable under binding Court of Appeal authority.