The English High Court handed down its first judgment on the question as to whether Brexit can amount to an event of frustration, such that a party could be deemed to have discharged its contractual obligations.
The European Medicines Agency (EMA) sought to argue that Brexit (if and when it happened) would be an event of frustration which would allow the EMA to treat its lease of premises in London as having been discharged.
The High Court determined that Brexit could not constitute an event of frustration. Whilst Smith J did not go so far as to determine that Brexit could never amount to a frustrating event, this judgment does offer the market a certain amount of comfort that arguments of this sort will be difficult to win in practice.
In particular, Smith J offered the following guidance which will be helpful to our clients when they are considering potential arguments that Brexit amounts to a frustrating event:
- the prospect of withdrawal was not foreseeable as at August 2011 (ie when the lease was originally entered into), even if it had been a theoretical possibility at that time, and
- the EMA and its landlord had no common purpose to frustrate on the basis of Brexit (a required hurdle to pass in order that a frustration argument can succeed).
The EMA is an agency of the EU, currently based in London. It holds a 25-year lease on premises in Canary Wharf owned by the claimant landlords, and in August 2017 wrote to its landlords stating that, if and when Brexit occurred, it would treat that event as a frustration of the lease. The landlords commenced these proceedings seeking a declaration that the EMA would remain bound by the lease regardless of Brexit.
The English doctrine of frustration operates to bring a contract prospectively to an end because of the effect of a supervening event. According to one well known formulation, frustration occurs “whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract……. It was not this that I promised to do.”
Over the years various classes of frustrating event have been recognised by the courts. Only two were relied upon by the EMA:
- subsequent legal changes and supervening illegality, and
- frustration of common purpose
The EMA’s legal capacity
The EMA’s primary case on supervening illegality centered on the capacity of the EMA and effectively amounted to an argument that after the withdrawal of the UK from the EU, the payment of rent by EMA under the lease would be ultra vires - it could not lawfully use the premises itself, nor could it share, sub-let or assign them. This was rejected. The judge accepted that protections provided by EU law would be affected, but was “completely confident” that the EMA’s capacity to deal with immovable property, or even the EU’s capacity to maintain the headquarters of its agencies in a third country, remained unaffected.
There were, therefore, no constraints on the EMA’s capacity such as to cause the lease to be frustrated. Even if such constraints existed, they were irrelevant to the question of frustration by supervening illegality. Furthermore, to the extent that the EU had failed to ameliorate the effects of the UK’s withdrawal on the EMA, any frustration would be self- induced.
This element of the judgment, which takes up the bulk of it, looks specifically at the capacity of the EMA in relation to a lease and is not likely to be of much broader relevance except in similar scenarios perhaps involving other EU agencies.
The second class of frustrating event relied on by the EMA is potentially of more general interest. The EMA argued that there would be a frustration of common purpose between the parties as a result of the UK’s withdrawal. In this context, the judge held that the prospect of withdrawal was not foreseeable when the lease was originally entered into in August 2011, even if it had been a theoretical possibility. This got the argument past the first hurdle and provides an indication of the likely approach a court will take to the question of the foreseeability of Brexit given that timescale.
Despite clearing that hurdle, the EMA fell at the next; there had been no common purpose in this case to be frustrated beyond the purpose to be derived from the construction of the lease. Outside the terms of the lease, the parties’ purposes were not common but divergent, with the parties focussed on their own interests. The same could presumably be said of many commercially negotiated agreements, so it is here that the judgment is potentially of more general relevance. Following this approach would make frustration arguments based on Brexit in the context of such agreements very difficult to win unless a true common purpose could be divined.
In this particular case, the lease presented the EMA with further difficulties. It contained no break clause but had made provision for the EMA vacating the premises by way of the alienation provisions. The judge concluded “the supervening event… is in reality the EMA’s involuntary departure from the Premises, due to circumstances beyond its control. … this involuntary departure was, in fact, not merely envisaged but expressly provided for in the Lease, and that there was no common purpose different to that contained in the Lease.”
The judge’s conclusions were the same regardless of whether the scenario being examined was “no deal” or withdrawal subject to the terms of an agreement.
When considering the wider impact of the judgment it is also worth noting that it applies existing principles of frustration and does not appear to contain any significant developments of those principles except possibly in the context of their application to an alleged supervening incapacity to act which the judge described as a novel point.
What happens next?
The judge considered that this was a case where he had a discretion as to whether to refer the issue of capacity to the European Court. He declined to make a reference and no doubt had in mind the need to provide some guidance to the parties before 29 March. The EMA had argued that this was a case in which the judge was obliged to make a reference. It may yet decide to pursue that point and others on appeal. The case clearly raises issues of great significance and it may be suitable for a leapfrog appeal to the Supreme Court.
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.