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Can Brexit be used as a reason for escaping contracts?

  • United Kingdom
  • Brexit

20-02-2019

Summary

Judgment was handed down by the English High Court on 20 February in the case where the European Medicines Agency (the EMA) had argued its 25 year lease in Canary Wharf was frustrated as a result of Brexit. The judgment ruled against the EMA and concluded that “the Lease will not be discharged by frustration on the United Kingdom’s transition from Member State of the European Union to third country nor does the EMA’s shift of headquarters from London to Amsterdam constitute a frustrating event”.

Background

As a reminder, frustration is an English common law concept that allows for parties to be discharged from a contract if there is a frustrating event: one that makes further performance of a contract impossible, illegal or significantly different to that contemplated by the parties, but successful arguments on frustration are rare.

What did the High Court decide?

The conclusions of the judgment are:

• the lease was not frustrated by reason of an event which amounted to supervening illegality. The judge made the point that the legal effects on the EMA of the UK’s exit from the EU could have been, but were not, ameliorated by the EU;

• there was no frustration using the argument that the “common purpose” of the contract was frustrated (that common purpose alleged to be that the premises would be the headquarters of the EMA for the term of the lease). Here the fact that the lease contained lengthy and carefully worded clauses on alienation (for example that the lease could be assigned or sub-let) meant that the parties had considered that the premises might cease to be the headquarters of the EMA;

• the EMA had consciously entered into a 25 year lease without a break clause, so that, in the view of the judge, it could be said that the EMA assumed the risk of change over that 25 year period. Although Brexit may not have been anticipated or been in the contemplation of the parties, it was foreseeable that over the long period of time of the lease there might be some development that would require the EMA to leave the premises and the parties had catered for this possibility in the lease because it included alienation provisions;

• the parties’ actual agreement and how they allocate risks under it “can be of great significance when considering whether the contract has been frustrated. That is particularly so, where the contract is a sophisticated one, appearing to make provision for all subsequent contingencies”;

• in this case there was no “common purpose” going beyond the contract in question, nor any common view or expectation between the parties that the risk of the EMA leaving should be treated differently depending on the reason for its departure.

Conclusion

Claiming frustration as a result of Brexit should remain an unlikely route to success in most cases, particularly where a contract contains detailed provisions covering either unexpected events or where it could be argued that the risk of change is dealt with in another way (for example as in this case by envisaging that if the EMA had to leave, there were provisions in the lease allowing it to assign or sublet). The limits on successful use of this doctrine mean that it remains unlikely to be a solution to adverse effects arising from Brexit. The caveat is that there have been suggestions that the EMA might seek to refer its case to the European Court of Justice and it is always open to them to appeal to the English Court of Appeal.

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