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Brexit - The (Legal) Definition of Frustration?

07 June 2019

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It is probably fair to say that the words “Brexit” and “frustration” will have featured in the same sentence a few times over the past couple of years. However, earlier this year the High Court in England confirmed its view that Brexit is not, in fact, a frustrating event. Well, not in the legal sense at least.

In the case of Canary Wharf (BP4) T1 Limited & others v European Medicines Agency

([2019] EWHC 335 (Ch)), the question the High Court was asked to address was whether the occurrence of Brexit (when, or indeed if, it happens) constituted an external event giving rise to frustration of a (lease) contract.

It is entirely possible that many of us have found frustration to be a natural consequence often following conclusion of a contract. However, in both England and Scotland, the legal doctrine (as opposed to the general emotion) relates to a situation where both parties can be freed from their previously agreed contract responsibilities.

Eileen Sherry
Eileen Sherry

How would such a situation of contractual liberation ordinarily arise? Traditionally, the threshold has been a high one – available when an exceptional, unforeseen event, occurring after a contract has been finalised, makes it impossible for the parties to carry out their agreed commitments. Whilst various adjectives have been used to describe the Brexit process of late, the outcome of the Canary Wharf case will confirm whether “exceptional” should be one of them.

By way of background, the case relates to an attempt by landlords of extensive, bespoke, premises in London to clarify that a particular lease contract would not be affected by the future occurrence of Brexit. In response, the tenant, the European Medicines Agency (“EMA”), argued that Brexit would free it from its lease responsibilities. The EMA made more than one argument, but a key point centred on a particular EU law (passed after the UK’s intimation of its intention to leave the EU) which required the EMA to have its headquarters in the Netherlands (i.e. not London).

The judgment in Canary Wharf is lengthy, touches on several different areas of law, and is worthy of a full seminar for discussion. Its conclusion, however, is that the circumstances narrated by the EMA do not reach the required threshold to establish contract frustration. The Court held that it is not impossible for the EMA to keep up its end of the bargain, meaning it cannot escape its commitments under the contract. The practical effect of the decision left the EMA with premises it says it is unable to use, for the next twenty five years, costing the not-insubstantial sum of approximately £500m over the lease term.

Aside from its assistance in developing the doctrine of frustration, the case also highlights the importance of considering key factors which might affect the commercial success of a contract. If there are factors which could feasibly arise and render fulfilment of the contract terms difficult or uneconomic, parties should think carefully about building in specific protection against the occurrence of those factors. A break clause, if available, could have been of significant assistance to the EMA here. The commonly used force majeure clause is another example of just such protection.

Perhaps unsurprisingly given its consequences, the High Court’s ruling from earlier this year is currently under appeal, but for now from the EMA’s perspective it is (no doubt frustratingly) a case of wait and see.

Contact: Eileen Sherry, Associate T. 0141 221 8012

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