One occasion when Brexit isn’t frustrating…
On 20 February 2019 Marcus Smith J ruled that the European Medicines Agency’s 25 year lease of HQ premises in Canary Wharf was not frustrated… Read more
On 20 February 2019 Marcus Smith J ruled that the European Medicines Agency’s 25 year lease of HQ premises in Canary Wharf was not frustrated by Brexit and the European Medicines Agency’s relocation to Amsterdam. We considered this case, and the English law concept of frustration, in an earlier blog endless frustration – can Brexit cancel a contract, and look now at the reasons for the Court’s decision and some principles which may be useful for others whose contracts are affected by consequences of Brexit.
The European Medicines Agency (EMA) argued that its lease was frustrated by Brexit, and the EMA’s resulting relocation, either because the EMA’s performance of the remainder of the lease was illegal or because Brexit frustrated the common purpose of the parties that the premises should be used as the EMA’s HQ.
A contract is frustrated, and both parties are relieved of future performance, if events after signature of that contract make its future performance illegal or fundamentally different from what was expected, and those events could not reasonably have been foreseen (see endless frustration – can Brexit cancel a contract, for more detail).
The EMA lease was signed in 2014, but the relevant date was August 2011 when the EMA and Canary Wharf Group entered into an agreement for lease.
Marcus Smith J found that:
- Contrary to the EMA’s arguments, it would not be illegal for the EMA to continue to use the property (relocation was an understandable matter of politics and an HQ in a third country would not enjoy various protections available within the EU, but it was not a legal requirement) or for it to sub-let or assign the lease (its constitution gave it wide powers, including to deal with property outside the EU).
- On the facts there was no “common purpose” of the parties beyond the express terms of the lease.
- As at August 2011, Brexit was not reasonably foreseeable. However, the problem arose not because of Brexit, but because of the resulting relocation of the EMA’s HQ.
- Even if it had been illegal for the EMA to continue to perform its lease obligations or there had been a common purpose that the property be used as the EMA HQ, the lease would not have been frustrated because the possibility of the EMA relocating was. The lease in fact provided for this possibility by including a right to sub-let or assign (though it was acknowledged that the terms for disposal were deliberately onerous) and the possibility of a break clause had been considered.
The judgment does not give us much help in deciding when Brexit did become reasonably foreseeable, and in several respects, the case turned on its particular facts. For example, because the EMA was a creation of the EU, any illegality was self-induced because the EU required the relocation and could have addressed the alleged problems in the 2018 regulation requiring that relocation. The judgment gives no guidance on whether Brexit may have been foreseeable at different times in different sectors, or at different times by parties in the UK, elsewhere in the EU, or in third countries.
The decision does however provide a useful restatement of the principles of frustration and some hints about how arguments of frustration based on Brexit are likely to be considered by the courts. In a short blog, we can’t do justice to the detail of Marcus Smith J’s 95-page reasoned judgment, but the following may be some useful pointers:
- The decision was based primarily on the assumption of a “no-deal Brexit” since, if this did not frustrate the contract, it was unlikely that a negotiated, deferred or revoked Brexit would do so. However the judge also considered these other possibilities briefly: a deferred Brexit would merely shift the exit date and so made no material difference to the arguments as to whether the contract was frustrated. A negotiated Brexit might ameliorate some (but not all) of the relevant effects of Brexit (and the withdrawal agreement specifically provides for relocation of the EMA), and would similarly not frustrate the lease. (He understandably refused to speculate on the possibility of a negotiated Brexit on some currently unknown variant of the proposed withdrawal agreement.)
- The court considered the foreseeability of Brexit in the light of evidence from two experts in the field of modern British political history and political science, based on information in the public domain. The question of whether Brexit was foreseeable was for the court – the experts’ role was to remind the judge of nature of the debate at the time the contract was made.
- It will usually be possible to frame the frustrating event in a number of ways, and the judge cautioned against doing so too closely to the particular event which occurs. The EMA had argued that the frustrating event was Brexit, but it could equally be attributed to the EMA’s involuntary need to leave the property due to circumstances beyond its control. Whilst Brexit was not foreseeable in August 2011, it was foreseeable that during the 25 year term of the lease there might be some development requiring the EMA to leave the property for circumstances beyond its control, and the provisions in the lease for sub-letting and assignment applied whatever the reason for the EMA abandoning the property. This suggests that it will be difficult to argue that a contract which addresses the general risk of, for example, currency fluctuation or varied tariffs is frustrated if Brexit results in variations to exchange rates or tariffs – at least if the fluctuation due to Brexit is not out of kilter with the variation which might be expected to result from other causes.
- The test for frustration is whether a supervening event makes the performance of the contract “radically different” from that contemplated at the date of the contract. The judge stressed that the doctrine is not easily invoked.
- A contract may be frustrated, even if it is possible to perform the strict (express or implied) terms of the contract, if a wider “common purpose” is defeated by the supervening event.
- When considering a claim of frustration, relevant factors will include the contract terms; the context of that contract; the parties’ knowledge, expectations, assumptions and contemplations at the date of the contract, particularly as to risk; the nature of the supervening event; and the parties’ calculations as to the possibility of performance in the new circumstances. The court will also consider the demands of justice, and in doing so, will take account of the risk allocation in the contract, particularly if it incorporates sophisticated provisions appearing to address all subsequent contingencies. In this case, holding the EMA to the lease will cause it unexpected financial hardship, but frustrating the lease would also cause commercial damage to Canary Wharf Group – and, critically, the lease allocated this risk (of relocation) to the EMA.
- Frustration for illegality is not limited to illegality in the sense of a legal wrong (breach of common law or legislation), but extends to illegality on public policy grounds (for example, things which are contrary to good government, harmful to morality or economically against the public interest, or which interfere with the machinery of justice), and can arise because of a change of law, or a change of circumstance which makes unlawful something which was previously lawful.
- However supervening illegality is to be considered by reference to the place of performance – if, contrary to the court’s view, the EMA did not have legal capacity to continue to use or sub-let/assign the lease, this illegality arose as a result of a change in the law of the EMA’s place of incorporation rather than in the place of performance (England), and was therefore irrelevant.
- A self-induced problem will not frustrate a contract – a party who could have taken steps to ameliorate the impact of a supervening event (for example, by obtaining an exemption) but fails to do so, will find it difficult to claim frustration. “Self-induced” problems can include the results of commercially-rational decisions about the way you choose to conduct business, for example by prioritising resources for some contracts over others.
- Marcus Smith J stressed that he was certainly not going to criticise the parties for trying to resolve the issue in a commercial way without litigation; still less would he regard such efforts as prejudicing the EMA’s frustration claim. Parties who may be hesitating to take action to mitigate Brexit consequences for fear such action may prejudice their ability to argue for frustration if such efforts fail, may take comfort from this in going ahead with such action.
The court also considered how the EU (Withdrawal) Act 2018 should be interpreted. This Act incorporates directly applicable EU law as it operates immediately before exit day into UK domestic law. As part of its argument that performance had become illegal, the EMA argued the Withdrawal Act would not give it the benefit of certain protections which made its buildings and archives inviolable within the EU because, even when incorporated into UK domestic law, these protections would still apply only to premises/archives in the territories of EU member states. Marcus Smith J robustly rejected this interpretation – the whole point of the Withdrawal Act was to incorporate EU law that previously applied to the UK, as a member state, into UK law even when the UK was a third country: the EMA’s interpretation would result in “manifest absurdity” as it would apply EU law in member states where it already applies (giving the Withdrawal Act a surprising extra-territorial effect), and fail to apply EU law in the UK where it would not otherwise apply.
The judge rejected the EMA’s arguments that he should (or must) refer the matter to the Court of Justice of the European Union (CJEU): just because the UK’s withdrawal from the EU is a matter of immense significance and importance did not mean that every legal question arising out of that withdrawal was similarly significant and important.
The EMA has until 29 March 2019 to appeal. Particularly given the sums at stake, we may not have heard the last of this.
On 1 March 2019, Marcus Smith J granted the EMA leave to appeal his judgment to the Court of Appeal, so the Brexit debate will continue here too.