Developments in contract: Frustration
A brief summary of the principles, recent developments and practical tips relating to the doctrine of frustration of contract.
- The law of frustration allows an entire contract to be discharged prospectively due to a supervening event.
- A contract is said to be frustrated where a supervening event (without the default of either party and for which the contract does not provide) causes a contractual obligation to be incapable of being performed because if it were to be performed, the result would be something completely different to what the parties had in mind when they entered into the contract.
- As frustration brings the entire contract automatically to an end, it should be narrowly construed and only available in limited circumstances.
- In Canary Wharf v European Medicines Agency, the European Medicine Agency, or EMA, claimed that Brexit was a frustrating event which discharged its tenancy of a property in Canary Wharf. The EMA claimed: (1) frustration due to supervening illegality (primarily because the EMA alleged that it would be ultra vires for it to carry on paying rent) and (2) frustration of common purpose (due to the fact that Brexit was unforeseeable at the time of the parties’ agreement and the performance of the lease, following Brexit, would render it something “radically different” than what the parties agreed).
- The Court found against the EMA on both grounds. Although the protections that the EMA enjoyed under EU law would be “materially and adversely” affected following Brexit, it continued to have the capacity to perform its obligations under the lease. Furthermore, the EU had the capacity to maintain the headquarters of its agencies in third countries, regardless of the fact that there may be many non-legal reasons why the EU would not wish to do so.
- However, even if the EMA’s capacity was restricted after Brexit, the Court considered such frustration to be self-induced because it was within the EU’s power to ensure that Regulation (EU) 2018/1718, which dealt with the EMA’s relocation to Amsterdam, also properly addressed the winding down of the EMA’s activities in the UK.
- The Court further found that there was no common purpose outside of the lease, with each party focused on its own interests. Although at the time the lease was entered, the UK’s withdrawal from the EU was not foreseeable, it was foreseeable that there could be a development which required the EMA to involuntarily leave the property due to circumstances beyond its control. This development was catered for by the inclusion of express alienation provisions in the lease which allowed the EMA to assign the lease or sub-let the property.
What this means
- As the prospect of Brexit changes the business landscape, some parties will be assessing their legal position and whether they can offset any negative effects through legal remedies. Among such remedies are likely to be the doctrines of force majeure and frustration.
- This judgment serves as a useful reminder that the relevant principles on frustration will be narrowly construed and that, properly analysed, there are few true cases of contractual frustration. Although the purpose of the doctrine of frustration is to do justice, the Court will not intervene simply because a “change in circumstances causes hardship to one of the contracting parties”.
- Although the Court found that there was no supervening illegality, even if this were so, it would have been illegality arising under EU law and not English law, because it would have been EU law that curbed the EMA’s capacity to deal with the lease. To this end, English law of frustration generally does not have regard to supervening illegality arising under a foreign jurisdiction when determining whether a contract continues to exist under English law.
- The EMA contended that the Court was obliged to refer the present case to the Court of Justice of the European Union. However, Mr Justice Smith held that it was within his discretion not to do so and that the issues could be properly decided under English law.
The EMA withdrew its appeal of this decision in July 2019 after it successfully sublet the property.
For a more in-depth analysis of Canary Wharf v European Medical Agency, please see our elexica article.
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.