+44(0)20 7638 9271

English Court rules that Brexit does not frustrate the lease of the European Medicines Agency

There has been much commentary on whether Brexit could amount to an event of ‘frustration’; the English doctrine which operates to bring a contract prospectively to an end because of an unexpected supervening event.

That question has now been considered by the English courts Canary Wharf (BP4)
T1 Ltd v European Medicines Agency
in a judgment given on 20 February 2019[1].

 

Charles Spragge and Ben Lomer of Druces LLP discuss the judgment and its possible consequences:

The European Medicines Agency (EMA) is an agency of the European Union. Since 2014, it leased premises in Canary Wharf for a term to 2039 (the Lease).

In August 2017, the EMA told the landlord (CW) that if and when Brexit happened, they would have to relocate and they would treat Brexit as a frustration of the Lease such that the EMA would not have to pay the rent for the rest of the term of the Lease.

The EMA said: “It would be unprecedented and incongruous for an EU body such as the EMA to be located in the UK and continue to pursue its mission in London after the UK has left the EU. Such circumstances were simply not contemplatable at the time of entering into the Lease.

To resolve the commercial uncertainty, CW sought declarations from the Court that Brexit and/or the relocation of the EMA to Amsterdam would not cause the Lease to be frustrated and so the EMA would continue to be bound by the terms of the Lease including to pay the rent to the end of the term.

The EMA (in broad summary) relied on the following grounds:

  1. Brexit would cause the EMA to lose certain protections and immunities necessary for its function unless it relocated;
     
  2. Post- Brexit the EMA would no longer be able lawfully to use the premises;
     
  3. It would be exposed to paying double rent in London and Amsterdam; and
     
  4. As a standalone point, ongoing performance of the Lease would be ultra vires.

The Court considered various possible Brexit scenarios, but most importantly the No Deal Brexit; if a No Deal Brexit did not cause frustration, the other scenarios almost certainly would not either.

 

The English doctrine of Frustration

The general test for frustration derives from the 1956 case of Davis Contractors[2], in which the judge stated as follows:

“…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.”

In the 1981 case of National Carriers [3] the judge formulated the test slightly differently:

Frustration of a contract takes place where there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances: in such case, the law declares both parties to be discharged from further performance.”

In the 1990 case of Lauritzen AS[4],the Court identified five propositions:

  1. The doctrine of frustration was evolved to mitigate the rigour of the common law’s insistence on literal performance of absolute promises. The object of the doctrine was to give effect to the demands of justice, to achieve a just and equitable result, to do what is reasonable and fair, as an expedient to 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.

 

Would a No Deal Brexit frustrate the Lease?

In short, the Court said no, it would not.

As a starting point, the Court held that the EMA would have capacity, post-Brexit, to continue to use and/or dispose of the Premises and to pay rent under the Lease. 

The Court accepted that the EMA’s protections would (despite continuing to some extent) be materially and adversely affected by Brexit, and that there were good reasons why the EU would want to relocate the EMA to an EU member state. However, the judge said he was completely confident that the EMA would continue to have capacity as a matter of EU law to maintain or wind down its premises in the UK after Brexit. The EMA’s supervening illegality argument failed. The judge declined to exercise his discretion to refer the EU law issues to the Court of Justice of the EU (CJEU).

The Court went on to consider whether (if it was wrong on the capacity issue) supervening illegality would either by itself cause the lease to be frustrated or would be a significant factor in frustration. After an analysis of the interplay between the law of incorporation (EU law) and the law of the contract (English law), the Court held that in considering the doctrine of frustration under English law, supervening illegality as a matter of foreign law was not relevant save in very limited circumstances – and it was not relevant to this case.

The judge further added that even if he was wrong on supervening illegality, the legal effects of Brexit on the EMA could have been ameliorated by the EU. Accordingly, if there were frustration it would have been self-induced, and the EMA could not rely on it.

The Court also rejected the EMA’s argument based on frustration of a common purpose. Although it held the UK’s withdrawal from the EU was not relevantly foreseeable at the time of contracting in 2011 (albeit it was foreseeable as a theoretical possibility) there was never a mutual understanding that the Lease was intended to provide a permanent headquarters for the EMA for 25 years.

The judge found that the Lease was not the outcome of a common purpose but of rival negotiations driven by different objectives, with each party bargaining (with advice) to get what they wanted. In addition, the lease contained specific provisions to allow the EMA to sub-let or assign which would allow them an orderly exit from the premises.

The judge concluded that the present situation did not come close to a case of frustration of common purpose. The supervening event was the EMA’s involuntary departure from the premises, but this was an event that was expressly provided for in the Lease. Given the importance of the issues and the sums involved, the decision may be appealed and the EMA have also indicated they may still seek a reference to the CJEU.

While the background to this case is quite specific, the decision will come as a relief to landlords. And more generally, although the Court’s finding that Brexit was not ‘relevantly foreseeable’ (at least in 2011) may encourage some parties to seek to terminate contracts by relying on Brexit, the judgment serves as a reminder that the English doctrine of frustration applies in very limited circumstances only.

If you have any questions arising out of this article or would like to discuss the judgment and how it may affect your business please contact c.spragge@druces.com or b.lomer@druces.com.

Footnotes:

[1] https://www.judiciary.uk/wp-content/uploads/2019/02/2019-02-20_Canary-Wharf-v-EMA_Approved-Judgment.pdf

[2] Davis Contractors Ltd v. Fareham UDC [1956] 1 AC 696 at 729

[3] National Carriers Ltd v. Panalpina (Northern) Ltd [1981] 1 AC 675 at 700

[4]Lauritzen AS v. Wijsmuller BV, The “Super Servant Two” [1990] 1 Lloyd’s LR 1 at 8

 

NB: Charles Spragge  will be discussing jurisdiction and choice of law agreements and what changes to them may be needed in the light of Brexit, at a Breakfast Briefing on 14 March 2019 (see our website for details). If you would like to attend please contact Rachel Hill r.hill@druces.com.

 

Contacts

Charles Spragge

Partner – Finance and Dispute Resolution

T: +44 20 7216 5548  E: c.spragge@druces.com

Benjamin Lomer 

Senior Associate – Property Litigation

T: +44 20 7216 5570  E: b.lomer@druces.com

Nicholas Brent 

Partner – Head of Property

T: + 44 20 7216 5561  E: n.brent@druces.com

Julian Johnstone 

Partner – Head of Dispute Resolution

T: +44 20 7216 5502  E: j.johnstone@druces.com