Brexit: not (yet) frustrating (enough)

Earlier this year, the High Court rejected the argument advanced by the European Medicines Agency (EMA) that the UK’s departure from the EU would constitute a ‘frustrating’ event for the purposes of their 25-year lease of commercial premises in Canary Wharf thereby releasing both parties from all further obligations: Canary Wharf (BP4) T1 Limited and others v European Medicines Agency [2019] EWHC 335 (Ch).

While the decision will no doubt have brought welcome relief to landlords, the relief may be short-lived because in March the EMA was granted permission to appeal on all grounds and on 15 April 2019 the EMA lodged its appeal. The appeal is currently due to be heard by March 2020.

At first instance, the High Court had ordered an expedited trial to enable a ruling to be given in advance of the UK’s previously scheduled date of departure from the EU of 29 March 2019. It remains to be seen whether, in light of the most recent extension of exit day to 31 October, the Court of Appeal will similarly expedite the appeal.

What is frustration?

The long-established but rarely-deployed doctrine of frustration provides that a contract will be treated as if all primary obligations have come to an end (in legalese, the contract is ‘discharged’) where an event occurs after the contract has been entered into, which is both unexpected and beyond the control of the parties, and which renders it physically or commercially impossible to fulfil the contract, illegal or renders the performance of the contract radically different to that which was envisaged at the time of entering into the contract.

What arguments were advanced and what was the judge’s reasoning?

The EMA had argued ‘frustration’ on two bases:

1. The EMA’s primary argument was that the UK’s departure from the EU constituted an event of ‘supervening illegality’. The EMA argued that, post Brexit, it would not have the legal capacity to continue to pay rent for a property it could no longer use itself (because the EU had ordered it to move its headquarters from London to Amsterdam and, in any event, as an EU entity, it could not have its headquarters in a “third country”, which is what the UK would be after Brexit) and it similarly did not have the legal capacity to assign or sub-let the premises to an entity which could use the premises i.e. a non-EU entity.

2. The EMA’s fallback argument was that the ‘common purpose’ of the parties was for the premises to be used as the EMA’s permanent headquarters for the duration of the lease and that purpose had been frustrated.

Mr Justice Smith held as follows:

1. In the event of Brexit, the EMA would retain the capacity to deal with immoveable property located in a third country and the EU itself had the capacity to maintain the headquarters of its agencies in a non-EU country. As such, there was no legal impediment to the EMA’s ability to perform its obligations under the lease, whether by way of continuing to pay rent or assigning/sub-letting the premises. Even if this was wrong, save for very limited exceptions, the English law of frustration did not recognise supervening illegality which arose under a foreign law. While Mr Justice Smith accepted that if he was wrong on both of those points, the EMA would have been unable to make any profitable use of the premises, such frustration would have been self-induced (and therefore ineffective) in light of the fact that the EU could have done more than simply ordering the relocation of the EMA, for example by legislating for the winding down of the EMA’s position in the UK and thereby ameliorated the position, but it chose not to. As a result, on any view, the EMA’s argument as to supervening illegality could not succeed.

2. Brexit was not “relevantly foreseeable” – namely, sufficiently foreseeable that it should have informed the manner in which the parties framed their agreement - in August 2011 when the parties had concluded the lease. However, not only was there no common purpose, but the parties in fact had entirely different purposes: the EMA wanted bespoke premises with the greatest flexibility as to term and the lowest rent possible; the landlord wanted the security of long-term cashflow at the highest rent possible and was prepared to allow the EMA a say in the building’s configuration to achieve that. This was corroborated by the absence of a break clause and the express provision allowing the EMA to assign or sub-let the lease. In short, the EMA could not say this was not what it had bargained for.

Comment

While it is unsurprising that the doctrine of frustration was construed narrowly, the judgment leaves open the possibility – at least in theory - of Brexit constituting a frustrating event in contracts concluded before Brexit was “relevantly foreseeable”, for example where parties can show a common purpose to their contract which specifically depended on the UK remaining in the EU. In terms of pinpointing when Brexit will be deemed to have been “relevantly foreseeable”, the judgment makes clear that is certainly the case by June 2016 when the UK had the referendum on EU membership. All we can deduce on the earliest date for now is that it is sometime after August 2011.

What can parties who are concerned about Brexit-risk do?

Parties negotiating contracts now should consider how Brexit (or indeed other political decisions or uncertainty) may impact the contract and specifically provide for that in express terms (for example, by spelling out what will – or will not - constitute a force majeure).

For parties with contracts entered into before June 2016 which stand to be negatively impacted by the UK’s departure from the EU, it is worth revisiting those contracts and considering whether there are points of distinction from the recent decision in Canary Wharf such as may give rise to an argument that the contract has been frustrated and thereby allow the parties to walk away.

Contact Us

If you have a query relating to an existing contract please contact either Josephine Mathew or Meera Patel.