Not Everyone Finds Brexit Frustrating

The English high court has ruled that Brexit cannot be used as a reason to terminate a contract on the grounds of frustration. Whilst the judgment concerned the effects of Brexit on a commercial lease, it reaches further than property law as frustration is a legal doctrine which is applicable to all contracts. The case serves to highlight that parties who seek to get out of their contractual obligations on the grounds of frustration, in particular as a result of the UK leaving the EU, will face an increasingly uphill struggle.

The Facts

In Canary Wharf v European Medicines Agency1, the European Medicines Agency (the EMA) was a tenant of a 25-year lease of office premises in Canary Wharf, London, which served as the EMA’s headquarters.

Following the result of the UK’s referendum on 23 June 2016 to leave the EU, the EMA – an EU agency – was required to relocate its headquarters to Amsterdam as the UK would cease to be an EU Member State after 29 March 2019. The EMA indicated to its landlord, the claimant in this case, that if and when Brexit occurred they would treat it as frustrating the lease such that the lease would terminate. In response, the landlord issued proceedings to seek a declaration that Brexit and/or the EMA’s relocation of its offices to Amsterdam would not cause the lease to be frustrated.

The EMA argued, amongst other things, that the lease should be frustrated given that:

1. it lacked the legal capacity to use or profitably make use of the premises (referred to as “frustration by supervening illegality”); alternatively

2. the contractually contemplated purpose of the lease, to provide headquarters for the EMA for the following 25 years, was no longer viable, rendering the lease so “radically different” from what the parties originally agreed (referred to as “frustration of a common purpose”).

The Decision

On 20 February 2019, Mr Justice Marcus Smith ruled that Brexit – even in the form of a “no deal” Brexit, in which the UK’s divorce from the EU was considered to be the “most stark” – could not frustrate the lease. The court conceded that whilst Brexit would materially affect the EMA’s ability to operate in the UK, it would not be impossible for the EMA to continue to have premises in London.

In summary, Marcus Smith J decided as follows:

(1) Frustration by Supervening Illegality

The judge rejected that there was a supervening illegality, namely that following Brexit the EMA would lack the legal capacity to continue performing its obligations under the lease. The EMA was able to deal with immovable property based outside of the EU and the EU would have capacity to maintain the headquarters of its agencies which were based outside of the EU. Whether or not the EU would choose to do so post-Brexit was irrelevant to the question of legal capacity.

Applicable Law

On addressing the applicable governing law to determine the question of legal capacity, Marcus Smith J confirmed that the law of the country of the party’s incorporation or domicile (which in this case would be EU law) was only relevant to whether that party had the ability to enter into the contract in the first instance; all supervening events and possible illegalities would be determined by the governing law of the contract (in this case English law). Therefore, even if the office relocation caused by Brexit amounted to a supervening illegality under EU law, this was not relevant to an English law determination of frustration.

There are limited grounds upon which an English law-governed contract may be considered frustrated by supervening illegality under the laws of another country. For example, where a contract is to be performed in a foreign country and the performance becomes illegal by the laws of that country. However, no such exceptions applied in this case.

Notwithstanding the above, the judge commented that for supervening illegality to frustrate a contract, it must remove all or substantially all of the benefit that one party receives from the contract. Had the judge found that (i) the EMA lacked legal capacity under EU law and (ii) it was relevant to determining questions of frustration under English law, then in the circumstances the lease would be frustrated as a result of Brexit as the EMA would be unable to use the premises whilst remaining obliged to pay the rent.

Self-induced Frustration

Finally, even if the court had agreed that it would be illegal for the EMA to continue to perform its obligations under the lease, the court held that any such frustration was self-induced as the EU had enacted legislation which necessitated the EMA to move offices. The office move was neither necessitated by public international law nor EU law; the decision to move was pragmatic, political and a matter of policy. It would of course be inequitable to allow a party to avoid its contractual obligations on this basis.

(2) Frustration of a Common Purpose

The judge also rejected the argument that the parties shared a common purpose that the lease should act as the headquarters of the EMA for the next 25 years. The judge found that the parties had divergent (as opposed to common) purposes and commercial interests when negotiating the lease.

Factors Relevant to Frustration

Marcus Smith J confirmed that the approach to be taken to the application of the doctrine of frustration would depend on a variety of factors as set out in The Sea Angel2. These include amongst others the terms of the contract, the parties’ knowledge and assumptions (in particular as to risk) at the time of the contract, and the nature of the supervening event. As a general rule, the supervening event must be (i) outside the contemplation of the parties at the time they enter into the contract and (ii) so fundamental that it transforms the obligations of a party under the contract into something “radically different” to that which they expected when entering into the contract, with the result that the contract is incapable of being performed.

Foreseeability of Brexit

Whilst the UK’s departure from the EU was foreseeable as a “theoretical possibility” at the time the parties agreed to enter into the lease (the agreement to enter into a lease having been signed in 2011), it was not “relevantly foreseeable” by the parties.

However, the judge found that the possibility of the EMA involuntarily leaving the lease at some point during its term was foreseen, such that Brexit had not rendered the lease so radically different that it had been frustrated. This was highlighted by the length of the lease, the absence of a break clause and the limited options to assign and underlet the premises.

Conclusions

Frustration has the effect of terminating a contract and discharging parties from their remaining contractual obligations. It therefore comes as no surprise that the doctrine of frustration is applied very narrowly by the English courts, as this case serves to highlight, in particular where Brexit is to be relied upon as the frustrating event. The difficulty in making a successful claim on the basis of frustration is emphasised by the fact that even the EMA, an EU agency, failed in its arguments that Brexit was a frustrating event despite having set up its operations in the UK whilst it was a Member State of the EU.

However, if it can successfully be shown that the contracting parties did in fact share a common purpose at the time of entering into their contract that depended on the UK remaining within the EU, then it is possible that Brexit could amount to an actionable frustrating event.

The decision in Canary Wharf v European Medicines Agency gives a degree of certainty to contractual interpretation, at least for now: imagine the floodgates of claims which would ensue had the court found that Brexit did in fact frustrate the lease. However, the application of the doctrine of frustration is very fact-dependent as this case highlights. Further, reports are that the EMA is considering whether to appeal this decision, and so in parallel with the political process of Brexit to date, this case may develop into a quickly evolving landscape – so watch this space.

Footnotes

1) Full citation of the case: (1) Canary Wharf (BP4) T1 Limited, (2) Canary Wharf (BP4) T2 Limited, (3) Canary Wharf Management Limited v European Medicines Agency [2019] EWHC 335 (Ch)

2) Full citation of the case: Edwinton Commercial Corporation v Tsavliris Russ (Worldwide Salvage and Towage) Ltd, The "Sea Angel" [2007] EWCA Civ 547.