Will Brexit frustrate commercial contracts?

Canary Wharf v European Medicines Agency 2019 EWHC 335(CH), 183 ConLR 167 Chancery Division

Facts

EMA took a lease of a large office building in Canary Wharf in 2014.  In 2017 the UK notified the EU of its intention to Withdraw, scheduled for 29 March 2019 and the EU subsequently passed a regulation (EU2018/1718) whereby the EMA was obliged to relocate its headquarters to Amsterdam so it no longer had a use for the building.

The EMA notified Canary Wharf that it intended to treat Brexit as frustration of the lease, therefore releasing EMA from performance of its obligations as lessors under the lease.  Canary Wharf sought a Court Declaration that the lease was not and could not be frustrated by Brexit.

Held by the Chancery Division:

The lease was not frustrated as the purpose for which the lease had been entered into (provision of commercial office space) still existed, and in English Law there was nothing unlawful about a European agency owning an interest in property in the United Kingdom even if it was no longer in the EU.

Comment

1. The doctrine of “frustration” applies where, without either party being in default, a contractual obligation can no longer be performed because the circumstances have changed so much that the performance itself would be something quite different from that which was provided for in the contract.
2. EMA argued that there was frustration of the common purpose of the contract, and also frustration by supervening a legality.
3. Frustration of common purpose – clearly EMA’s purpose in going into the lease was to have an HQ for its operations as the medicines agency for the European Union. However that was not a purpose shared with the landlord.  The parties’ purposes were in fact conflicting.  Naturally the EMA wanted good premises, a flexible term and the lowest possible rent.  Conversely Canary Wharf wanted long term cash flow at the highest rate available.  There was no “common purpose” between the parties.
4. Frustration by supervening illegality - The court noted that EMA had legal capacity to own property in a third country, and that it was free to assign or sublet these premises if it no longer wished to occupy the building itself. It was also noted that in both international and EU Law, the EU had legal capacity to maintain the headquarters of its agencies in a third country if it so wished.
5. In any event, such constraints on the EMA’s ability to act would not have been relevant; English law does not take any such supervening illegality into account. It has regard only to whether performance of the contract will be unlawful according to the place of performance (England) and not according to the place of incorporation.
6. It was noted that any legal effects of Brexit on the EMA could have been ameliorated by the EU but it had instead ordered the EMA to move its HQ to Amsterdam, meaning that in effect any such frustration was self-induced.
7. Apart from its topicality, this case is interesting as a reminder of the narrow grounds upon which frustration is applicable. It is rare that a common purpose will generally exist sufficient to support a frustration argument.  “Illegality” is determined strictly by reference to the laws of England and Wales rather than the laws of a third country, although these may operate upon a foreign party to an English contract.

For more specialist legal advice contact our Construction & Engineering team.