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Brexit and the doctrine of frustration of contract

Canary Wharf (BP4) T1 Limited v European Medicines Agency [2019] EWHC 335 

 

Frustration of a lease - whether Brexit frustrated lease - doctrine not to be lightly applied - issue of foreseeability

 

Factual background:

The European Medicines Agency ('EMA') is a body of the European Union. They entered into a agreement with the plaintiffs ('CW') to lease offices at Churchill Place, Canary Wharf.

Following the Brexit vote, the EMA relocated to Amsterdam and wrote to CW, stating that they were treating the lease as frustrated and by extension, that they were free from any future obligations of the contract. CW applied to the High Court for a declaration that the contract still stood.

 

Applicable law:

Mr Justice Smith noted that the following test, which was laid out by Lord Radcliffe in Davis Contractors v Fareham UDC [1956], has stood the test of time:

'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.'

He then went on to cite five principles which govern the law on frustration in the UK, as set out by Bingham LJ in J Lauritzen AS v Wijsmuller BV [1990]: 

  1. The doctrine of frustration evolved to mitigate the rigour of the common law's insistence on literal performance of absolute promises... an expedient escape from injustice where such would result from enforcement of a contract in its literal terms after a significant change in circumstances.
  2. Since the effect of frustration is to kill the contract and discharge the parties from further liability under it, the doctrine must not be lightly invoked and must be kept within very narrow limits.
  3. Frustration brings the contract to an end forthwith, without more and automatically. It does not require an act by the parties to the contract. 
  4. The essence of frustration is that it should not be due to the act or election of the party seeking to rely on it. 
  5. A frustrating event must take place without blame or fault on the side of the party seeking to rely on it. 

 

Frustration of purpose

The EMA contended that Brexit constituted frustration of a common purpose between the parties - a clear illustration of what this means be observed in the difference between the two 'coronation' cases.

In Krell v Henry [1903], the defendant had agreed to let the plaintiff's flat for the purpose of viewing the coronation procession of Edward VII. However, the procession was called off after the King was laid low by illness. The defendant, who had paid a deposit only, refused to pay the remaining sum owed on the contract as it had been, by his reckoning, frustrated by the King's illness. The court held that the common purpose had been frustrated as viewing the King was the defendant's sole reason for hiring the flat.

By contrast, in Herne Bay Steam Boat Company v Hutton [1903], the defendant hired a boat for the purpose of viewing up close a 'naval review' which was to take place during the coronation. The defendant also contended the contract was frustrated by the illness. The court disagreed, and held that the purpose of viewing the ships up close remained, they would simply remain docked.

In instant case, the idea that Brexit frustrated the purpose of the contract - ie, the defendant having a headquarters within the European Union - was rejected by the court as the offices were perfectly adequate for a workforce and indeed, had been kitted out especially for the defendant's needs. The bespoke nature of the premises meant it was still fit for the purpose.

 

Supervening illegality

Supervening illegality means that, due to some set of circumstances, performance of the contract has become illegal. This necessitates looking to the circumstances surrounding the particular case and in some instances, the contractual obligations may remain in place. 

The primary contention of the EMA here was that Brexit rendered unlawful actions which were previously lawful. They claimed there were questions surrounding the vires and capacity in relation to the payment of rent against the backdrop of this new legal landscape. The court conceded that the paying of rent while not being able to occupy the building could, in theory, constitute a frustrating event.

 

Self-induced frustration:

However, this frustration was self-induced in that the actions of the defendants effectively closed off any attempts at ameliorating the frustrating event. Accordingly, the court found that the lease was not frustrated by supervening illegality.

Even if the capacity issues that the EMA complained of did indeed exist, they failed to make any attempts to resolve or even improve the situation. The decision to vacate the premises and relocate to Amsterdam was entirely theirs.

 

Foreseeability:

The foreseeability of a particular event is a relevant consideration insofar as frustration is concerned, because where the parties have anticipated an event but have failed to provide a mechanism for dealing with same in the contract, frustration will not be found and the contract will remain in place.

Interestingly, the court permitted the adduction of expert evidence from an eminent political scientist in ascertaining whether - at the time the lease was entered into in 2014 - Brexit was foreseeable. So-called 'Brexit' clauses only began to show up in real-estate contracts from 2016 onwards and so, the court held that while there were certain outliers advocating for the UK's withdrawal from the EU, it was not so prominent in the mind of the public as to be considered a 'foreseeable event.'

 

Conclusion: 

Smith J concluded that the lease had not been frustrated by the UK's withdrawal from the European Union - neither by supervening illegality nor frustration of common purpose. Therefore, the EMA remained bound by the lease and the requirement to pay rent. 

Immediately after this judgment was handed down, the EMA signalled their intent to appeal this decision. However, the appeal was dropped when they found a suitable tenant (WeWork) to sub-let the premises to. Since the Court of Appeal did not get the chance to scrutinise Mr Justice Smith's rather narrow conception of frustration, it remains open for future claimants to argue that Brexit constitutes a frustrating event.

Read the judgment in full here.

 

 

 


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