Brexit: maddening but not frustrating when it comes to contracts

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Brexit may be maddening for businesses, amid all the uncertainty that surrounds it, but the High Court has ruled that it does not constitute grounds for frustration of contract.

In passing judgement in Canary Wharf v European Medicines Agency the High Court found in favour of Canary Wharf, ruling that whilst Brexit would materially affect the EMA’s ability to operate in the UK, it would not be impossible for the EMA to continue to have premises in London.

The European Medicines Agency (EMA) was seeking to pull out of a £500m lease for its London-based headquarters, arguing that the lease had been frustrated by the country’s imminent departure from the EU.

Frustration is a legal doctrine under English contract law by which an unforeseen event fundamentally changes the basis on which the contract was signed, making it physically or commercially impossible to fulfil, or transforming the obligation into something radically different.

The EMA agreed the lease in 2011, with an end date of 2039. However, as they are required to maintain headquarters in an EU Member state, a relocation would be required when the UK ceased to hold EU membership.  As a result, the EMA advised their landlord that they considered Brexit was an event that frustrated the agreement and therefore gave grounds to terminate the lease.  Canary Wharf Group refused to accept the argument, issuing proceedings which led to the case being heard in the High Court.

There was widespread concern among commercial landlords in the run up to this judgement, due to the potential impact of a ruling in favour of the EMA across the wider economy which may have led to further frustration claims.

The doctrine of frustration applies to all contracts and, although this judgment concerned the effects of Brexit on a commercial lease, the ruling suggests anyone trying to get out of their contractual obligations as a result of the UK leaving the EU would face an uphill battle.

The timing of when a contract was made is important in this regard, as Brexit could have been foreseen well before the referendum was called. Furthermore, any frustration claim would need to demonstrate that the benefit of a contract would be lost, not just that the performance of the contract is harder to deliver.