David Smillie

February 2014... Commercial contracts are a part of every-day life for all businesses and they can of course vary in scope, complexity and value depending on the subject matter. Often contracts will include provisions that are intended to address risks for either party during performance of the contract, for example insurance provisions and “force majeure” provisions that are intended to protect against certain events (such as earthquakes, floods etc). However what happens where, due to a change in circumstances, it becomes impossible to perform the contract or performance becomes radically different from the original intentions? That is where the doctrine of “frustration of contract” comes into play.

Cases concerning “frustration” are not common and therefore the Supreme Court case of Planet Kids Ltd v Auckland Council is a useful illustration of the requirements for a contract to be “frustrated”.

The Planet Kids case concerned a childcare business operated by Planet Kids on land leased from the Council. The Council wished to acquire the land for roading purposes and gave notice under the Public Works Act. Planet Kids objected to that notice and eventually Planet Kids and the Council entered into a settlement agreement under which Planet Kids would receive a compensation payment from the Council for loss of goodwill arising from closure of the business and the Council agreed to waive a disputed claim for rent. In return the Council would obtain a surrender of the lease, vacant possession of the property, a restraint of trade and the chattels on the property. The Council paid an initial 10% deposit to Planet Kids with the balance payable on the settlement date (20 December 2010) when Planet Kids was due to deliver the formal lease surrender document.

However, on 2 October 2010 the building was destroyed by a fire and under the terms of the lease document the lease was automatically terminated as a result of that destruction. The Council then claimed that the settlement agreement had been “frustrated” and they had no obligation to pay the remaining balance of the compensation sum since Planet Kids was no longer able to surrender the lease to the Council on the settlement date (as the lease no longer existed at all). The High Court agreed with the Council and (on appeal by Planet Kids) the Court of Appeal confirmed the High Court decision. Planet Kids then appealed to the Supreme Court where the judges took a different view.

The Supreme Court considered that the settlement agreement was a compromise designed to resolve the dispute between Planet Kids and the Council arising from the Public Works notification and that its main purpose was to provide certainty to both parties and avoid a protracted objection process. Following the fire Planet Kids was not able to transfer the chattels to the Council or provide a formal lease surrender document however the Council still obtained closure of the childcare business, termination of the lease (due to the fire), vacant possession of the property and the ability to meet its own timeframes for the roading works – which were all the important benefits sought by the Council in entering into the settlement agreement. The Supreme Court held that the obligations that Planet Kids could no longer perform as a result of the fire were not sufficient to make the settlement agreement “radically different” and therefore the settlement agreement had not been frustrated and instead continued as a valid contract.

Although these types of situations seem to be uncommon, it is useful to see how the Supreme Court has considered and applied the law of “frustration” in this case by taking a wider “multi-factorial’ approach to consider all the circumstances as opposed to the narrower interpretation in the High Court and Court of Appeal. Planet Kids is no doubt a firm supporter of the appeals process!