Can Brexit frustrate a contract?

In 2011, the European Medicines Agency (the EU body tasked with the evaluation and supervision of medicines for human and veterinary use within the EU) entered into a 25 year lease at Churchill Place, Canary Wharf, which began in October 2014.

The background

 
In 2011, the European Medicines Agency (the EU body tasked with the evaluation and supervision of medicines for human and veterinary use within the EU) entered into a 25 year lease at Churchill Place, Canary Wharf, which began in October 2014. 

Following the UK’s vote to leave the EU, in August 2017 the EMA informed their landlord (Canary Wharf) that they would treat the lease as having been frustrated if and when Brexit occurred. 

The law of frustration operates to end a contract due to the effect of a supervening event which is: (a) not contemplated by the contract; and (b) is not due to the default of either party.  The event has to change the nature of the rights and obligations under the contract such that it is unjust to hold the parties to the contract in the new circumstances. 

EMA argued that Brexit would frustrate their lease due to:

• “supervening illegality” as the EMA would no longer have the legal capacity or power to perform its obligations under the lease

Canary Wharf and the EMA had a “common purpose” entering into the lease for the building to be the EMA’s headquarters, and Brexit would thwart that common purpose.

The development

The court rejected EMA’s claim.  While the judge noted that Brexit was not reasonably foreseeable at the point the lease was agreed in 2011, and that it would mean the EMA could not remain headquartered in London without losing certain protections of being in an EU Member State, this was not sufficient to frustrate the lease.

Whilst the court acknowledged that there were many reasons why the EU would prefer agencies such as the EMA to be headquartered in an EU Member State, these also could not frustrate the lease.  In particular:

• ·on the proper construction of the relevant laws, the EMA’s capacity or power to perform its obligations under the lease were not constrained
• even if the EMA was so constrained, and that was sufficient to frustrate the lease, these constraints had been self-imposed by the EU in response to Brexit. 

Further, the lease had fully addressed the interests of both parties, and gave the EMA the possibility to leave the premises, with assignment and sub-letting permitted in certain situations.  As such, there was no “common purpose” over and above the terms of the lease so as to frustrate the lease when it could not be achieved.  

Why is this important?

This ruling provides a reminder of the high bar for parties pursuing frustration of contracts and indicates that, in the majority of cases, parties will not be able to rely on frustration as a convenient exit mechanism to escape unfavourable contracts following Brexit.  The judge’s reasoning suggests that for any frustration claim based on Brexit to succeed, Brexit itself will have to be a supervening event, rather than any decisions taken in response to Brexit.

Any practical tips?

Consider introducing express contractual permissions to deal with foreseen circumstances and/or, if possible, the consequences of unforeseen consequences, eg through force majeure provisions, termination rights, price adjustment mechanisms, etc.  Brexit specific permissions (including customs issues, currency fluctuations, etc) should also be considered.