Brexit: no dealbreaker either
Is the impact of Brexit on commercial contracts such that an adversely affected party might be able to avoid the contract through frustration? An English High Court decision suggests not
Among the many legal issues occupying lawyers and clients since the UK’s EU membership referendum in June 2016 has been the possible impact of Brexit on commercial contracts. In particular, what happens where a contract suddenly becomes less attractive to a party as a result of the UK’s impending departure from the EU? What options might be available to parties seeking an exit from such contracts?
A case decided in the English High Court on 20 February – Canary Wharf v European Medicines Agency  EWHC 335 (Ch) – suggests that parties seeking to escape such contracts face an uphill struggle, absent a clear contractual entitlement.
Frustration: a high bar
The case concerned the headquarters of the European Medicines Agency (“EMA”) – the EU body tasked with the evaluation and supervision of medicines for human and veterinary use within the EU – at Churchill Place in Canary Wharf, London. In 2011, the EMA agreed to take a 25-year lease with the landlord of the premises, Canary Wharf (“CW”). The lease started in October 2014.
In August 2017, the EMA informed CW that, if and when Brexit occurred, it would be treating the lease as having been frustrated as a matter of English law. The English contractual doctrine of frustration operates to bring a contract to an end because of the effect of a supervening event. Specifically, it applies where there is a supervening event, which is not contemplated by the contract, and which is not due to the default of either party. The event must significantly change the nature of the outstanding contractual rights and obligations to the extent that it would be unjust to hold the parties to it in the new circumstances.
CW sought an early determination of the issue from the English courts, with a view to having judgment ahead of the UK’s planned Brexit date of 29 March 2019. The EMA argued that Brexit would have the effect of frustrating the lease on the basis:
(1) of a “supervening illegality”, because the EMA would no longer have the legal capacity or power to perform its obligations under the lease; and
(2) that in entering into the lease the EMA and CW had a “common purpose” that the premises should be the EMA’s headquarters, and that shared purpose had been thwarted.
In a 95-page judgment, Mr Justice Marcus Smith rejected the EMA’s position. Whilst the judge accepted that Brexit was not reasonably foreseeable when the lease was agreed in 2011, and that the EMA could not maintain its headquarters in London without substantially degrading certain protections it would enjoy if it was headquartered in an EU member state, these factors were insufficient to frustrate the lease.
The judgment is a reminder of the high bar set by the courts for frustration of contracts, and suggests that in the vast majority of cases the doctrine of frustration is unlikely to provide a convenient exit for parties whose contracts suddenly appear less attractive in light of Brexit.
The EMA had argued that it would no longer have capacity to continue with the lease since the relevant EU laws had been modified to provide that, in the event of Brexit, the EMA’s headquarters would move from London to Amsterdam. On this basis, the EMA argued that, following Brexit, it would no longer have legal capacity to continue with the lease.
The court acknowledged the many political, commercial and other reasons as to why the EU would prefer agencies such as the EMA to be headquartered in EU member states, including the protections the EMA would enjoy if it was headquartered in an EU member state.
However, the judge found that:
- on the proper construction of the relevant laws, there were no legal constraints on the EMA’s capacity or power to perform its obligations under the lease; and
- even if the EMA did face such constraints, and those constraints would otherwise be sufficient to frustrate the lease, such constraints had effectively been self-imposed; it was not Brexit itself that created those constraints but rather the EU’s response to Brexit in changing the EU laws which dictated where the headquarters had to be.
This aspect of the case therefore suggests that, in order to found a claim for frustration based on Brexit, parties will need to be able to show that Brexit itself is the relevant supervening event, rather than decisions which they have taken in response to Brexit.
The EMA also argued that, in entering into the lease, the EMA and CW had shared a “common purpose” – over and above the express terms of the lease – that the premises would constitute the EMA’s headquarters, and that, once the EMA was no longer able to use the premises as its headquarters, that purpose would be defeated and the lease frustrated.
The court dismissed this argument, finding that the interests of the parties were fully addressed in the lease, and there was no “common purpose” not catered for in the lease. In particular:
- whilst CW had been very accommodating with the EMA with a view to inducing the EMA to commit to the premises as its headquarters (including bespoke design of the premises and financial inducements), it had done so for its own commercial purpose of obtaining a suitable anchor tenant on a long-term lease;
- the lease had clearly contemplated the possibility of the EMA leaving the premises, with alienation provisions allowing the EMA to assign or sublet under certain circumstances; and
- the EMA had sought, but been unable to negotiate, a break clause in the lease.
Accordingly, rather than sharing a common purpose that the premises would be the EMA’s headquarters throughout the term of the lease, the parties had foreseen the possibility of the EMA leaving the premises, and negotiated the terms on which it could do so. Whilst the reason for the EMA’s departure – Brexit – was unforeseen, there was nothing to suggest that the parties had intended this eventuality to be treated differently.
This aspect of the decision is a reminder of how difficult it will ordinarily be for a party to a detailed, sophisticated commercial agreement to argue that there was some shared purpose of the parties not articulated or catered for in the lease itself, and which was so central to the parties’ agreement that its frustration should have the effect of discharging the parties’ obligations under the lease.
With Brexit of some description still looming, it is unlikely that this will be the last high-profile case in which a party employs creative arguments to seek to escape a contract which suddenly appears unattractive following the UK’s departure from the EU.
However, this judgment suggests that the doctrine of frustration is unlikely to be a fruitful avenue for such parties. If Brexit does not frustrate a lease for an EU agency’s London HQ, it is unlikely to assist in anything but the most unusual case.
Stephen Goldie is a partner and head of Litigation, and Jared Oyston a senior associate in the Litigation team, at Brodies LLP.