Does Brexit cause frustration?

The European Medicines Agency (“EMA”) has been taken to court by its UK landlord, Canary Wharf Group, which wants the EMA to keep paying a rent bill estimated to be around £500 million for the remainder of its 25 year lease. The lease of the EMA’s premises in London’s Canary Wharf district was signed in 2014, but the EMA argues that, as Brexit forces it to leave the UK, the lease has been “frustrated” and so it should not be liable to pay the sums due under the remainder of the lease. Although this litigation relates to a lease of land the decision – which is due later this year – is likely to provide useful guidance as to how the English courts will treat all allegations of frustration connected with Brexit.

What is frustration?

Frustration is a principle of English law which allows for a contract to be discharged when an unforeseen event occurs after the formation of the contract which renders it (i) physically or commercially impossible to fulfil the contract, or (ii) transforms the obligations to be performed under the contract into radically different obligations from those undertaken at the moment the contract was entered into by the parties. If a contract is frustrated then both parties are excused from their future obligations under it.

However, frustration is a hard argument to win. The burden of proof is high and it often turns on the facts of the case, as in order for an event to be deemed “frustrating” it must:

• have occurred after the contract has been formed;
• be fundamental to the contract;
• not be due to the fault of either party;
• be entirely beyond what was contemplated by the parties when they entered into the contract; and
• render performance of the contract impossible, illegal or radically different from that contemplated by the parties at the time of the contract.

Is “Brexit” a frustrating event?

With the above in mind, whether or not Brexit is deemed to have frustrated the EMA’s lease is likely to hinge on whether or not Brexit was entirely beyond what was contemplated by the EMA and Canary Wharf Group at the time they entered into the lease. Given that Brexit has been part of the political discourse for several years, it will be interesting to see whether the EMA’s argument of frustration will be upheld by the court. Furthermore, there may be a policy decision to be made by the court as, if the EMA succeeds, the decision could open the “floodgates” for thousands more similar challenges.

In any event, and regardless of the court’s decision, we would advise that all organisations try and pre-empt any scenario where they would seek to rely on Brexit causing frustration by amending their contracts to explicitly deal with Brexit. Whilst including explicit provisions in a contract to accommodate for Brexit is a complex task, it will provide more commercial certainty than any attempt to rely on allegations of frustration.

For more information about how to amend your contracts in light of Brexit see here.