Sudbrook Trading Estate Ltd v Eggleton [1983] 1 AC 444

Key points

  • Where the contract stipulates a machinery (i.e. mechanism) for a third party valuer to be appointed by a contractual party to determine the price of the contract on an objective basis, the failure by such party to appoint such third party valuer, amounting to self-induced frustration of the contract, shall not prevent the court from substituting and ordering some other machinery to determine the price on an objective basis
  • If however, the contractual machinery stipulates that the price is to be determined on a subjective basis by a valuer having special knowledge of the asset to be purchased, the court will not be able to substitute its own machinery and the contract will be terminated by frustration

Facts

  • Four separate leases were made in relation to adjacent industrial premises
  • Each lease contained an option for the lessees to purchase the premises upon the expiry of the leases
  • Upon expiry, the tenant (C) sought to exercise the option but the landlord (D) refused to appoint a surveyor
  • Under the option clause, the exercise price of the option, which was to be fair and reasonable, was to be determined by a valuer appointed by D, however, D refused to appoint a valuer
  • D argued that since no valuer was appointed due to its own refusal to do so, the option clause was too vague to be enforceable as no price could be determined
  • The Court of Appeal held that the parties had simply come to an agreement to agree and a court could not compel a party to appoint a valuer and, therefore, the options were unenforceable

Issue

  • Was the option too uncertain to be enforceable due to D’s refusal to appoint a valuer?

Held (House of Lords)

  • Appeal allowed
  • The machinery for fixing the price was merely a subsidiary part of the agreement; the fact that the grantors refused to operate the machinery did not render the agreement unenforceable on the grounds that no price was fixed

Lord Diplock

  • “It may be that where upon the true construction of the contract the price to be paid is not to be a fair and reasonable one assessed by applying objective standards used by valuers in the exercise of their professional task but a price fixed by a named individual applying such subjective standards as he personally thinks fit, and that individual, without being instigated by either party to the contract of sale, refuses to fix the price or is unable through death or disability to do so, the contract of sale is thereupon determined by frustration. But such is not the present case.”
  • “In the first place the contract upon its true construction is in my view a contract for sale at a fair and reasonable price assessed by applying objective standards. In the second place the only thing that has prevented the machinery provided by the option clause for ascertaining the fair and reasonable price from operating is the lessors’ own breach of contract in refusing to appoint their valuer. So if the synallagmatic contract created by the exercise of the option were allowed to be treated by the lessors as frustrated the frustration would be self-induced, a circumstance which English law does not allow a party to a contract to rely on to his own advantage. So I see no reason why, because they have broken one contractual obligation the lessors should not be ordered by the court to perform another contractual obligation on their part namely to convey the fee simple in the premises to the lessees against payment of a fair and reasonable price assessed by applying the objective standards to which I have referred.”

Lord Fraser

  • ‘Accordingly when the option was exercised there was constituted a complete contract for sale, and the clause should be construed as meaning that the price was to be a fair price. On the other hand where an agreement is made to sell at a price to be fixed by a valuer who is named, or who, by reason of holding some office such as an auditor of a company whose shares are to be valued, will have special knowledge relevant to the question of value, the prescribed mode may well be regarded as essential. Where, as here, the machinery consists of valuers and an umpire, none of whom is named or identified, it is in my opinion unrealistic to regard it as an essential term. If it breaks down there is no reason why the Court should not substitute other machinery to carry out the main purpose of ascertaining the price in order that the agreement may be carried out.’

Commentary

  • This case is an example of how the courts can take a proactive role in curing uncertainty under a contract
  • In modern contracts, it is common to stipulate an alternative machinery to determine the price in a situation where one party in breach of contract refuses to appoint a valuer