Can Brexit Frustrate a Contract?

This article explores the High Court’s decision in Canary Wharf (BP4) T1 Ltd -v- European Medicines Agency [2019] EWHC 335 (Ch), which found that Brexit could not frustrate a lease between the European Medicines Agency (“EMA”) and the landlord of its premises (“CW”).  The EMA is an EU agency and in 2018, the EU decided to move its headquarters from London to the Netherlands as a result of the UK’s impending exit from the EU.  The EMA had signed a 25 year lease on the London premises and sought to break it early, relying on Brexit as a supervening event that frustrated the contract.

This case should be useful for students of contract law, as it is a good demonstration of the difficulties of pleading frustration, a doctrine that is often considered as a route out of an inconvenient contract, but which rarely succeeds in practice.  As we approach training contract and pupillage interview season, this is also a great example to raise if asked in an interview about a recent case that interested you, since it could be important to many clients who may be considering how to get out of contracts rendered unprofitable or radically different by Brexit.

Frustration Recap

The common law doctrine of frustration provides a means of discharging a contract when an unanticipated supervening event renders the nature of the contract radically different from what the parties expected.  The classic formulation of the doctrine was set out by Lord Simon in National Carriers Ltd v. Panalpina (Northern) Ltd [1981] 1 AC 675 at 700:

“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.”

Importantly, the performance of the contract does not have to be rendered impossible for it to be frustrated, but the supervening event must render performance of the contract “radically different” from the parties’ expectations at the time they entered into the contract.

An illustrative example that you may remember from university or law school is Krell v Henry [1903] 2 KB 740, where a flat was rented for the sole purpose of watching King Edward VII’s coronation procession.  When the procession was cancelled due to King Edward’s poor health, the Court of Appeal held that the defendant did not have to pay for the flat, since his purpose in renting it – to watch the procession – had been frustrated.

This article will only consider what the High Court’s judgment referred to as the EMA’s arguments on “frustration of common purpose”.  The EMA also argued frustration by “supervening illegality”, but these arguments relied heavily on issues of EU law that are very specific to the facts of this case and so of less general relevance.

When deciding whether there has been a frustration of common purpose, it is necessary to apply the “multi-factorial” approach set out by Rix LJ in the Sea Angel.  The Court will consider:

1. The parties’ expectations, including whether the risk of the supervening event was foreseeable or provided for in the contract at the time it was entered into.
2. The nature of the supervening event, and the parties’ reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances.
3. Whether the supervening event and its objectively calculated effects render the parties’ performance something “radically different” from the parties’ expectations and the common purpose of the agreement.

The Judgment relating to Frustration of Common Purpose

The Parties’ Expectations

The Court started this portion of the judgment by considering whether Brexit was foreseeable in 2011 when the parties entered the lease (paragraphs 215-216).  It concluded that while it was a theoretical possibility, it was not “relevantly foreseeable” (i.e. not so foreseeable as to prevent frustration).  This conclusion may differ the closer a contract start date gets to the 2016 referendum.  This may be a point of argument in any future cases on this subject: at what point in time did Brexit become relevantly foreseeable?

The Court also concluded from the fact that the EMA was permitted to assign or sub-let the lease that the “common purpose never amounted to a mutual contemplation that one of the purposes of the Lease was to provide a permanent headquarters for the EMA for the next 25 years and that if that could not be achieved, the common purpose of the Lease had failed” (para 217).

The Nature of the Supervening Event

The Court, referring back to its exploration of relevant EU law in its judgment on supervening illegality, concluded that Brexit (even a “Hard Brexit”) would not render the continued occupation of the premises impossible, although it did constitute a materially adverse change: “I find that the move from London to Amsterdam was not required as a matter of law: but it is readily understandable given the nature of the EMA’s functions and the essential desirability of having the EMA located within the territory of a Member State of the European Union.” (para 234).

Radically Different…

The Court found that, although Brexit was not contemplated by the parties as a potential future cause of the EMA’s relocation, the question of relocation of the EMA away from the premises was contemplated and was provided for by the assignment and sub-letting clauses in the lease.  This included involuntary departure from the premises for reasons beyond the EMA’s control.  As a result, the “radically different” threshold was not met.

Takeaways

This is a very high-level summary of a dense 92 page judgment, but is still a useful illustration of the high threshold required to argue frustration successfully.  Although this case had quite specific facts and does not preclude parties arguing frustration in relation to Brexit in the future, they may prefer to rely on alternative routes out of contracts, including, when available, force majeure clauses and specially negotiated “Brexit” clauses.

The EMA has appealed the High Court’s decision and The Student Lawyer will continue to monitor this case as it progresses to the Court of Appeal.