Although the UK has not yet left the EU, the English court has had to consider for the first time whether Brexit could result in the frustration of a commercial agreement. In this case, the contract in question was a 25-year lease taken by the European Medicines Agency (EMA) over premises in London. The court found that Brexit would not result in the lease being frustrated. The court’s decision (which may well be appealed) is not surprising. In most cases it is going to be an uphill struggle for a party to argue that Brexit will frustrate its contract, rather than merely leaving it with a bad bargain. The fact that the EMA, an EU institution that owes its presence in London to the UK’s EU membership, could not do so, serves to underline this difficulty: Canary Wharf (BP4) T1 Ltd v European Medicines Agency [2019] EWHC 335 (Ch).

One of the consequences of the UK’s vote in favour of leaving the EU has been the EU’s decision to relocate the headquarters of the EMA from London to Amsterdam. In 2017, in anticipation of this relocation, EMA informed its London landlord, Canary Wharf (CW), that “if and when Brexit occurs, [EMA] will be treating that event as a frustration” of the 25-year lease it had agreed with CW in 2011.

CW sought a declaration that Brexit would not frustrate the lease. EMA’s principal argument was that Brexit would trigger legal changes which would undermine the EMA’s legal capacity to continue with the lease, and so the lease would be frustrated by Brexit. The EMA also argued that Brexit would frustrate the common purpose of the lease.

The doctrine of frustration: a reminder

The nature and effect of frustration was described in National Carriers v Panalpina¹: “Frustration of a contract takes place where there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances: in such case, the law declares both parties to be discharged from further performance.”

According to the judge, the “prevailing wisdom” as to the juridical basis for the doctrine of frustration was the question of whether performance was rendered “radically different” by a fundamental change in circumstances. A multi-factorial approach is required, which includes considering (i) the terms of the contract; (ii) its matrix or context; and (iii) the parties’ knowledge, expectations, assumptions and contemplations, objectively assessed at the time of the agreement. What is clear is that the doctrine will not be lightly invoked and the courts will not allow frustration to be used as a “get-out-of-jail free card” for a party who has made a bad bargain.

Frustration due to subsequent illegality

EMA’s main argument for frustration was that of supervening illegality – that, upon Brexit, it would no longer have the capacity as a matter of EU law to continue to use the Canary Wharf premises or perform under the lease. In rejecting this point, the judge made three findings:

(i) EMA would not lack capacity (ie there would be no illegality). The EU Regulation which established the EMA conferred on it legal capacity, including the power to “acquire and dispose of …property”. This capacity was not entirely inward looking; it applied whether EMA was acting inside or outside the EU. Further, while the effect of Brexit would be to “substantially degrade” EMA’s immunities and privileges under the EU Treaties in the UK, EMA at least had capacity to dispose of property it held in a third country (for instance by assigning or sub-letting the entire premises, as it was entitled to so under the lease). Further, the EU itself had capacity to maintain its agencies’ headquarters in a third country.

(ii) Even if EMA would lack capacity under EU law, this would be irrelevant for the purposes of determining whether the lease had been frustrated. The judge held that, while EU law may be relevant to EMA’s capacity to enter into the lease, it was only English law which was relevant to the consequences of a lack of capacity, namely whether the subsequent illegality had caused the lease to be frustrated.

(iii) Even if he was wrong on (i) and (ii), the EU could have taken steps to ameliorate the negative legal effects of Brexit on EMA but did not do so (in fact the EU legislated in 2018 with the effect that the EMA was required to leave London for Amsterdam). Such “self-induced frustration” (EMA being an emanation of the EU) could not be a reason for bringing the contract to an end.

Frustration of a common purpose

As its alternative argument, EMA essentially maintained that one of the purposes of the lease was to provide a permanent headquarters for EMA for the next 25 years, and that if that could not be achieved, the common purpose of the lease would fail.

The judge noted that the “common purpose” of the parties to a contract in the context of frustration is something “more elemental” than “the individual terms and conditions” of the contract. If there is a common purpose (and many contracts will not have one), it may exist not just within the normal factors relevant to contractual interpretation (ie the words used and the “matrix” or “context”) but also within “the parties’ knowledge, expectations, assumptions and contemplations, in particular as to risk, at any rate so far as these can be ascribed mutually and objectively”.

However, here, there was no such common purpose. Rather the negotiation had been the product of two parties having different and divergent purposes: “The EMA was focussed on bespoke premises, with the greatest flexibility as to term, and the lowest rent. CW was focussed on long-term cash flow, at the highest rate, and was prepared to allow the EMA its say in the building’s configuration, provided that this was not adverse to CW’s interests.”

Moreover the occurrence of Brexit would not render EMA’s performance under the contract “radically different” from that envisaged at the time of contracting. The judge found that Brexit itself was foreseeable only as a “theoretical possibility” at the time of the relevant agreement but that it was perfectly foreseeable that, over the 25-year lease, EMA might have to abandon the premises. Indeed the alienation provisions in the lease expressly contemplated this possibility.

Comment

The fact that EMA, with its special status as an EU institution, could not establish frustration in this case reinforces how difficult it is likely to be for parties to argue that Brexit has frustrated their contracts. As such, unless the contract specifically addresses Brexit, parties are likely to be held to their contracts even if Brexit has made performance much more difficult or expensive. It is also apparent from the judge’s comments that it will be a very rare case indeed in which the frustration of common purpose argument will succeed – here the EMA didn’t even “come close” to establishing it. There may be more mileage in arguments based on supervening illegality (or impossibility) but only in the clearest cases and where the risk has not been allocated in the contract.

The judge’s finding that Brexit was not foreseeable in 2011, was perhaps not surprising, even though it was a theoretical possibility. The position would likely be harder to maintain in relation to contracts entered into nearer the date of the UK referendum (perhaps those after David Cameron’s Bloomberg speech on 23 January 2013 announcing his party’s policy to have an EU referendum), and impossible in relation to contracts entered into after the referendum result. The judge himself commented: “These days, and for the last two or so years, parties to contracts have no doubt been considering with some care what their contracts should say as regards the United Kingdom’s withdrawal from the European Union. Thus, the failure of the parties to a contract, post-referendum, to consider the inclusion of a “Brexit clause”, might be considered relevant to the allocation of risk”.

The judgment is also interesting because it is one of the first cases where the High Court (albeit at a relatively high level) has had to consider the meaning and effect of the key legal instrument in the UK that will give effect to Brexit (the European Union (Withdrawal) Act 2018 and also the draft Withdrawal Agreement agreed politically between the UK and the EU) and the impact that these documents may have in practice, depending on how events unfurl.

Footnote:

¹ [1981] 1 AC 675.