Brexit is not a frustrating event
In Canary Wharf v European Medicines Agency, the court considered the doctrine of frustration and provided a much anticipated decision on whether Brexit would constitute a frustrating event. This decision will no doubt be looked at with relief by property owners as it confirms the traditionally narrow scope of the doctrine and that it would be very difficult for parties to be released from their contractual agreements, even where these agreements may be dramatically compromised by Brexit.
The decision is also instructive for commercial contracts. We offer below some guidance on how parties should deal with the current unpredictable political and economic landscape in the context of long-term relationships.
What is frustration?
A contract can be automatically discharged on the basis of frustration where there has been a serious event which is unforeseen and beyond the control of the parties to a contract and which renders the contract physically or commercially impossible to fulfil, or transforms the contract into something radically different from what it was at the time the contract was entered into. This principle was established in Taylor v Caldwell but has since been developed by the courts. On the whole, the principal has been interpreted narrowly. However, a frustrating event has generally been deemed to have occurred by the courts where: (1) the event occurs after the contract has been formed; (2) it is fundamental to the contract; (3) it is entirely beyond what was contemplated between the parties; (4) it is not due to the actions or fault of either party; and (5) it renders further performance impossible, illegal or transforms the contract into something radically different from that contemplated by the parties at the time the contract was entered into.
Canary Wharf Ltd v European Medicines Agency
The claimants (collectively known as Canary Wharf Limited – the "Landlord") sought a declaration that the 25-year lease granted to the defendants (European Medicines Agency, an EU agency responsible for supervising medicines – "EMA") would not be frustrated by the UK's withdrawal from the EU.
- In 2011, the parties signed an agreement for lease and a construction management agreement.
- In 2014, the parties subsequently signed a 25-year lease for the premises for a reported rent of approximately £12-14 million per year and with no break clause.
- In August 2017, the EMA relocated its London office to Amsterdam (in accordance to the order by the EU in Regulation (EU) 2018/1718) and wrote to the Landlord to say that if and when Brexit occurs it would be treating it as a frustrating event for the purposes of the lease.
The EMA argued that the contract has been frustrated on account of the UK's exit from the EU by reason of:
- supervening illegality, on the basis that performance of the lease would become illegal in the sense of it being ultra vires; or (in the alternative)
- common purpose, on the basis that the lease was no longer being used for the contractually contemplated purpose (as EMA's headquarters).
- Supervening illegality
The court first examined whether the EMA had legal capacity to act in relation to the lease in a variety of Brexit scenarios, including a "no-deal" scenario. Although the court noted that the protections and privileges given to the EMA would be substantially downgraded, it would not affect the EMA's capacity to continue performing its obligations under the lease – such as, under article, 71 of Regulation 762/2004, to deal with immovable property in a third country and to assign or sub-let according to the lease. The court further determined that there were political and prudent reasons for the EMA (as an EU institution) to have its headquarters in the EU, but that there was no actual public international law that would impose a restraint on the EMA having its headquarters in a country outside the EU. Given this, the court concluded that EMA did have the requisite capacity to continue the lease and concluded that EMA's case based on supervening illegality, therefore, had to fail.
The court nevertheless went on to consider further issues relating to supervening illegality, which would have been applicable if the EMA had not been found to have the requisite capacity. The court considered:
- whether the English law of frustration could be extended by recognising supervening illegality arising under EU law – the court found that English law did not have regard for EU law as the contract would be unlawful on the basis of the law of the place of performance not the place of incorporation;
- whether the supervening illegality would have been capable of frustrating the lease – the court determined, on the basis of London and Northern Estates Company v Schlesinger that the lease would have been frustrated, as EMA would have been deprived of substantially all of the benefit from the lease; and
- whether the frustration would have been self-induced – the court concluded that it would have been self-induced on the part of EMA because the effects of Brexit on the EMA could have been ameliorated by the EU and had not been.
- Common purpose
The court considered the parties' expectations at the time of entering into agreements and signing the lease. Significantly, the court accepted that Brexit was not foreseeable when the agreements were entered into. However the court said that it had been foreseeable that over 25 years there would be a change or development that could necessitate EMA leaving the premises and, despite this, there was no break clause. Further, the court determined that the parties actually had entirely different purposes – the EMA's purpose was the lowest possible rent and flexibility on the term while the Landlord's purpose was long-term cash-flow at the highest rate and to ensure it was protected in the event of the EMA's departure from the premises.
The court therefore issued a declaration that the commercial lease between the EMA and the Landlord would not be frustrated by the UK's withdrawal from the EU.
What this means for commercial contracts
The case confirms the doctrine of frustration's narrow scope. The court's position confirmed that parties to agreements should acknowledge in the agreements that circumstances can change. The EMA could have addressed this risk through insisting on a break clause and the case demonstrates that in such circumstances the court will not rescue such a party by determining that a contract has been frustrated.
The case provides comfort to contracting parties that are reliant on the continuation of contractual promises, in that it rejected the notion that commercial contracts will be impossible to perform as a result of the UK leaving the EU. Even in circumstances in which the court acknowledges the significant financial impact that Brexit would have on one of the parties, the court was unwilling to find that it would not have been possible to continue with the contractual agreement.
The case also raises an interesting point with regards to foreseeability. Importantly, the court found that in 2011 Brexit was not foreseeable. The court did not comment on the earliest time in which Brexit would not be a foreseeable event but did note that it would have been foreseeable at the point of the referendum. It is likely that this would also extend to the preceding months once the referendum had been announced, but for those agreements entered into before 2016, it is arguable that Brexit would not be determined to be foreseeable. Therefore, the decision does not entirely preclude parties from claiming that Brexit is a frustrating event, although the decision as a whole confirms just how difficult this would be to argue.
Parties entering into commercial agreements should consider expressly providing for possible (if improbable) events in the light of a changing political landscape – such as through a carefully considered (and appropriately prescriptive) force majeure clause.
If you would like to discuss these issues, please contact Gordon Drakes or your usual contact within Fieldfisher's Commercial IP Team.
Co-authored by Rachel Bowley.