National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675

Facts

  • National Carriers Ltd leased a warehouse to Panalpina (Northern) Ltd for a term of ten years.
  • The only access road to the warehouse was closed by local authorities for about 20 months due to an adjacent building being unsafe.
  • Panalpina claimed that the lease was frustrated and sought to stop rent payments for the period during which access to the warehouse was blocked.

Issues

  1. Whether the doctrine of frustration applies to commercial lease agreements.
  2. Whether the 20-month closure of the access road constituted frustration of the lease, relieving Panalpina of its obligations, including rent payments.
  3. What standard or test should determine if a supervening event frustrates a lease.

Decision

  • The House of Lords affirmed that the doctrine of frustration can, in principle, apply to commercial leases, although its application is rare due to the nature of property rights.
  • The Court held the lease was not frustrated; the 20-month closure was insufficient relative to the ten-year lease term to fundamentally change the nature of the contract.
  • The Court emphasized that a much higher threshold must be met to establish frustration in leases and that only a situation “radically different” from the intended agreement could do so.

Legal Principles

  • Frustration in contract law releases parties from their obligations when an unforeseen event makes performance impossible, illegal, or radically different from what was agreed.
  • In leases, property interests and the intended duration mean the threshold for frustration is considerably higher than in ordinary contracts.
  • The “radically different” test (from Davis Contractors Ltd v Fareham UDC [1956] AC 696) governs frustration: hardship or inconvenience is insufficient; the contract must become fundamentally different.
  • Foreseeability reduces the likelihood of successful frustration claims, as parties are expected to allocate risks within the contract where possible.
  • Force majeure clauses are recommended to expressly allocate risks relating to unexpected events in commercial leases.

Conclusion

The House of Lords in National Carriers Ltd v Panalpina (Northern) Ltd clarified that frustration may apply to leases but only in rare circumstances where a supervening event makes performance radically different; here, the lease was not frustrated, affirming the importance of clear contractual risk allocation in property law.

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