Endless frustration – can Brexit cancel a contract?
Whether you voted leave or remain, many people are now frustrated by the experience of negotiating Brexit … but can we claim Brexit is also… Read more
Whether you voted leave or remain, many people are now frustrated by the experience of negotiating Brexit … but can we claim Brexit is also frustrating in the legal sense of the term? In January 2019 this point was debated by the European Medicines Agency (EMA) and Canary Wharf Group (CWG) in relation to whether the EMA’s 25-year lease of its London HQ building is frustrated by Brexit and the consequent relocation of the EMA’s HQ to Amsterdam.
The EMA has been based in London since 1995. In 2011 it agreed to take a lease of half of a new building in Canary Wharf for 25 years from 2014. The premises were adapted to the EMA’s specification and in October 2014 (slightly later than intended) the lease was granted with effect from 1 July 2014. The lease includes 5-yearly rent reviews from 2019, but no break clause. The lease includes a force majeure clause in favour of CWG, but not in favour of the EMA.
Under the doctrine of frustration, a contract is discharged and the parties are relieved of liability for future performance, if later events make performance by either party impossible or illegal. The EMA and CWG are seeking a declaration as to whether Brexit does, or does not, “frustrate” the lease. If it does not, the EMA will be liable for the costs of the lease for the remainder of the term, estimated at over £250m; if the lease is frustrated, CWG will lose the rental stream on which it relies to repay the lenders who funded construction.
Parties are assumed to take foreseeable risks into account when they contract, for example by including price adjustment clauses. A contract is therefore not frustrated by a later event which was, or should have been, foreseen by the party claiming frustration. (There is an exception in the case of wartime prohibitions on trading with the enemy, which will frustrate a contract even if the war was foreseeable at the date of the contract. But, however bad UK/EU relations may get, I hope we are not in this territory!) Because the argument is based on presumed assumption of risk, an event will be frustrating only if “a person of ordinary intelligence would regard it as likely to occur” or if it is one “which the parties could reasonably be thought to have foreseen as a real possibility” and “the event or its consequences must be foreseeable in some detail”.
Frustration can apply to any type of contract, but it is very rare for a lease to be frustrated. A lease for a long period of years is by its nature a long-term speculation and the parties are expected to have contemplated that circumstances may change. Even physical destruction of the property rarely frustrates a lease as this is usually covered by express clauses to repair, maintain and insure.
Much of the reported argument between the EMA and CWG has focused on whether Brexit was foreseeable in 2011 when the contract for lease was agreed, and the case was adjourned in September 2018 to allow expert evidence to be given on this point. The EMA argue that in 2011 the coalition government had reaffirmed its commitment to the EU, and Brexit was not something that “any person of ordinary intelligence would have regarded as likely”. The 2010 Conservative manifesto promised a referendum on the transfer of further powers to the EU, but not a referendum on EU membership. It was not until David Cameron’s speech at the Bloomberg HQ in January 2013 that he promised an in/out referendum if the Tories won the election.
CWG’s counter-argument is that UK membership of the EU has been the subject of debate for 40 years, and by 2011 Brexit was a real possibility. Article 50, permitting any state to withdraw voluntarily from the EU, was introduced by the Lisbon Treaty of 13 December 2007 which came into force on 1 December 2009.
The relevant question is not just whether Brexit was foreseeable, but also whether the EMA’s need to relocate was foreseeable. Even in the absence of Brexit, relocation of an EU agency is not unprecedented: in 2013 the EU Agency for Law Enforcement Training moved from London to Budapest. Monika Hohlmeier, a German MEP in charge of the EMA lease in 2011, says that she asked for the EMA (like every other EU agency) to have an exit clause – but both parties refused to include one as the London location had been chosen for political reasons and would not be changed, and an exit clause would make the lease more expensive … the second point certainly sounds like risk allocation.
Frustration for impossibility
“Impossibility” of performance includes physical impossibility (eg destruction by fire of a concert hall frustrated a contract for its hire) and a change of something which “goes to the root of the contract and is essential to its performance”. When Edward VII’s coronation was cancelled because the king was ill, this frustrated a contract to hire a flat overlooking Pall Mall because it was found to be a contract to hire facilities to view the procession along Pall Mall. However a contract is not frustrated just because a later event prevents one party putting the subject matter of the contract to the intended use – so cancellation of the naval review to celebrate Edward VII’s coronation did not frustrate a contract to hire a boat to watch that naval review and cruise around the fleet, because this was a contract for hire of a boat which could still be performed although the hirer’s motive was defeated.
Impossibility also includes “legal impossibility”: if further performance is made impossible by legislation, the contract is frustrated – a member of the Canadian Appeal Board was not entitled to damages for breach of contract when a Canadian statute abolishing the Appeal Board ended his job and remuneration.
The fact that performance has become impracticable – more expensive or more onerous – will not suffice: the Suez Crisis did not frustrate a contract for delivery of non-perishable ground-nuts although these had to be shipped around the Cape of Good Hope significantly increasing both the time and cost of shipping. The change must be one that makes performance “a different thing from that contracted for”, or “which so significantly changes the nature (not merely the expense or the 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”. The doctrine is not intended to be used to “relieve contracting parties of the normal consequences of imprudent commercial bargains”.
So is the EMA’s purpose or performance impossible – or simply impracticable? The EMA says the building was purpose-built as the EMA HQ and the EMA intended to occupy it as such for the whole term. CWG however says that only £3.44m of the total £154m building costs related to EMA requests (and £2.4m of this would also benefit other tenants), and the EMA’s position is the same as any other tenant who simply no longer needs the leased space.
Frustration for illegality
The requirements for frustration for illegality are slightly easier to satisfy. The public policy interest in compliance with law may outweigh what would otherwise be a fair allocation of the risk of the supervening event. It is therefore no surprise that the EMA is arguing that it is legally unable to occupy the premises for the intended purpose.
However there appears to be no legal requirement for an EU agency to be based in an EU state, though one can understand why the continuing EU states would want such a valuable asset to be within the EU. Even if there were such a requirement, or at least a need for the EMA to be within the EU to qualify for certain benefits, this would not make it illegal for the EMA also to own and sub-let property in the UK. The EMA might perhaps argue that Brexit constitutes a change of law which makes its use of the premises as HQ impossible even if not illegal, though the analogy with the Canadian Appeal Board case above would be closer if the EMA had been disbanded; in any case, there is still the sub-letting possibility.
The EMA faces a further hurdle too. Except in the case of wartime restrictions on trading with the enemy where public policy concerns are particularly strong, a contract is frustrated for illegality only if it is a term of the contract that the prohibited act is to be done. For example, if import or export restrictions prohibit goods being exported from or imported into a country, then a contract for the sale of those goods will be frustrated for illegality if the contract requires such export or import. However, those same restrictions will not frustrate the contract (for impossibility of purpose) if the restrictions simply prevent the buyer using the goods as it intended (even if the seller knew this was the intent).
The EMA’s obligations under the lease are the usual ones – to pay rent, keep in repair/decorate, use/occupy only as professional/commercial offices and for ancillary purposes, and not leave the premises continuously unoccupied for more than 7 days without telling CWG and providing caretaking/security arrangements reasonably agreed by CWG. Nothing in the lease actually requires the EMA to occupy the property, and there are express provisions permitting it to sub-let or assign.
Even if it is impossible to perform part of a contract, the contract will not be frustrated if the party can continue to perform other obligations so long as these are not trivial by comparison. For instance, when wartime blackout prohibited lighting street lamps, a contract to provide, maintain and light street lamps was not frustrated because the gas company could still maintain the lamps. So, even if occupation were impossible, the EMA could continue to pay rent, keep in repair etc, and ability to perform these other obligations might prevent frustration unless such obligations were considered trivial in comparison with occupation.
The EMA has in fact been trying to sub-let the property but so far has failed to do so. If an event is a frustrating event, it doesn’t matter if the parties don’t immediately treat it as such – but what they do in the meantime may weaken a later frustration argument. Although attempts to sub-let may appear to be an understandable commercial attempt to mitigate both parties’ loss, these attempts may support a CWG argument that this is a case of economic hardship, and not one of frustration.
At the time of writing, we are awaiting Marcus Smith J’s decision. I hope this will include guidance on the factors to be taken into account in determining whether Brexit and/or particular consequences of Brexit, is foreseeable. For example, it has been suggested that this might vary between industries (for example, are regulated cross-border industries to be assumed to be more aware of UK/EU political relations than industries more focused on the domestic market?), or depend on the political savviness of the parties. Could the answer be different for UK-based parties and EU-based parties or parties based in third countries who have simply chosen to contract under English law? What is the impact of attempts to mitigate loss?
When adjourning the case in September, Marcus Smith J ordered the collation of 2011 materials to enable the court to consider the extent to which a reasonable person might have foreseen Brexit and its impact in 2011, suggesting material such as UK opinion polls on the EU and party manifestos. The case may also assist on the methodology and procedure for cases claiming frustration on the basis of Brexit or its consequences, such as the issues which are relevant and the types of evidence which should be presented.
Most of the cases about frustration relate to wars (First and Second World Wars, the trapping of ships on the Shatt-al-Arab waterway during the Iran/Iraq war) or similar events such as the Suez Crisis – and many of the leading cases took a long time to reach a decision: World War I cases were still being heard in 1922, and Suez Crisis cases in 1962. Neither of these precedents seem to be happy omens for Brexit.
Other possible arguments
If a frustration argument won’t work, a party to a contract for an indefinite term may be able to argue there is an implied term to terminate on reasonable notice. This argument enabled a water company to end a 1919 contract to supply water to a health authority at a fixed price: by 1975, the cost of supply was more than 18 times the fixed price, but this had not frustrated the contact as the parties to a long-term fixed price contract had to be taken to have allocated the risks of market fluctuation.
The EMA’s inability to use the Canary Wharf building as its HQ is assumed to last for the remainder of the lease term. Where disruption caused by Brexit is temporary, a party claiming frustration will also need to show that this will defeat the purpose of a contract for a time-specified or time-limited event or that time “is of the essence” or that the period of interruption, in comparison with the contract term, is so long as to defeat the main purpose of the contract.
Finally, a brief note on force majeure. Whether Brexit or any particular consequences are covered by a force majeure clause will depend on the exact wording of the clause and its construction. A party wishing to rely on a force majeure clause should take care to follow any contractual procedure for claims – in 2017 failure to identify what the party was prevented from doing meant it had not provided the “full particulars” required by the force majeure clause, which was one reason for a force majeure claim failing. The wording of the force majeure clause may also impose a causative requirement which would need to be factored into the viability of any potential claim. In 2018 a first instance decision found that some force majeure clauses imposed a “but for” test so that a party is excused by a force majeure event only if it would have performed the contract in the absence of that event.
Although Marcus Smith J acknowledged the national significance of the CWG v EMA case, he refused an application for the Attorney General to intervene on the grounds of public policy. The parties are nonetheless perhaps providing a public service by allowing some at least of the issues with which many others may be grappling to be debated and, hopefully, clarified.
 Court of Appeal in Armchair Answercall Ltd v People in Mind Ltd (2016).
 Treitel, The Law of Contract, p902.
 Taylor v Caldwell (1863).
 Krell v Henry (1903).
 Herne Bay Steamboat Co v Hutton (1903).
 Reilly v R (1934).
 Tsakiroglu & Co Ltd v Noblee Thorl GmbH (1962).
 Lord Radcliffe in Davis Contractors Ltd v Fareham UDC (1936).
 This was the test of Lord Simon in National Carriers Ltd v Panalpina (Northern) Limited in 1981, applied by the Court of Appeal in 2016 in Armchair Answercall Ltd v People in Mind Ltd.
 Lord Roskill in Pioneer Shipping v BTP Tioxide Ltd (1982), also cited by the Court of Appeal in Armchair Answercall Ltd v People in Mind Ltd (2016).
 Leiston Gas Go v Leiston-cum-Sizewell UDC (1916).
 Court of Appeal in Armchair Answercall Ltd v People in Mind Ltd (2016).
 Staffordshire Area Health Authority v South Staffordshire Waterworks Co (1978).
 Triple Point Technology Inc v PTT Public Company Ltd. The force majeure claim, based on civil unrest, also failed because although such unrest fell within the contractual definition of force majeure, it was not proved that this prevented performance.
 Classic Maritime Inc v Limbungan Makmur SDN BHD.