Written by Jarvis Go

With the inclusion of Brexit related questions in last year’s EU, administrative law and constitutional law Tripos papers, one might have thought that private law topics were immune to Brexit. However, it is clear that Brexit has far-reaching implications on the realm of contract law.

Besides its emotionally frustrating effect on Remainers, Brexit could potentially be a frustrating event as a matter of contract law. The post-Brexit relocation plans of the European Medicines Agency (EMA) raised this interesting legal issue. Canary Wharf v EMAinvolved a contract for a 500 million-pound, 25-year, beast of a lease, where the EMA was the tenant. Crucially, the lease agreement was signed in 2011. The EMA is, as such, arguing that Brexit should be treated as a frustrating event, with Brexit being an unforeseeable event at the time of agreement, and where the consequences of Brexit have resulted in a radical change per the Davis Contractortest. With the contract being frustrated, the EMA is then released from its obligations under the lease, avoiding the significant rent payments when the bulk of its office have already been relocated to Amsterdam. The move is due to be completed in March 20193. It is noted that Canary Wharf v EMA just had its preliminary hearing on the 26th of September last month, before Mr Justice Marcus Smith, with its High Court trial slated for January 2019, a mere six weeks before Brexit day itself.

Brexit and Frustration: “It was not this that I promised to do”

It is noted that we could see many other cases like Canary Wharf v EMA. Financial institutions have been reviewing their exposure in the UK and questioning ‘how much space they need in London’, with Barclays Plc and Credit Suisse Group AG downsizing their Canary Wharf operations4. Legislative changes in the EU and domestically may mean that some financial institutions lose passporting rights5, which affect the ability of a firm to even operate in a particular jurisdiction. The grounding of aircraft in the UK (a scarily realistic prospect6) could affect Mediterranean hoteliers left with empty resorts and suppliers with no way of delivering goods on time. Brexit, and the accompanying legislative changes, will have far-reaching effects on many a contract, and may lead to frustration claims, as parties to the contract seek to avoid the contract altogether.

One can easily imagine a PQ set on this very topic. Tenants, tourists and suppliers (corresponding to the above examples) would seek to argue frustration as a means to discharge the contract, and to avoid failure to meet obligations under the contract and the accompanying damages claims.

For the purposes of the article, we focus on the exceedingly interesting Canary Wharf v EMA, involving a tenant who because of Brexit, has no need to be in the UK.

Requirements of frustration:

The House of Lords in National Carriers Limited v Panalpina (Northern) Limited7 is instructive:

“Frustration of a contract takes place when there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense or 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.”

Breaking it down, a contract is frustrated when it satisfies two conditions – (i) that the risk of frustration has not been allocated for, or borne by one of the two parties, and (ii) that there has been a radical change in obligations.

(i)     A foreseeable Brexit?

For (i), Iran Shipping v Steamship Mutual8 sets out factors that the court looks at when deciding if the risk has been allocated; where the (1) foreseeability of the intervening event, (2) the nature of the supervening event, and (3) whether there were inconclusive negotiations regarding risk allocation, are considered.

Indeed, the question of the foreseeability of Brexit weighed heavily on Marcus Smith J mind at the preliminary hearing, with Marcus Smith J noting that the two ‘big questions’ were ‘to what extent a reasonable person may have foreseen Brexit in 2011 and what its impact would be’9. As Treitel10 puts it, ‘Foreseeability will support the inference of risk-assumption only where the supervening event is one which any person of ordinary intelligence would regard as likely to occur’. However, even with this formulation, determining the foreseeability of a highly political event, in the year 2011, is still a massively vexed question, and the court must not substitute its own views for that of the common contracting man, and must not let hindsight affect its findings. Accordingly, it is laudable that Marcus Smith J ordered the creation of a ‘time capsule’ – a collation of ‘documents and material contemporary to 2011, such as UK opinion polls on the EU and political party manifestos’, allowing the court to approach what a reasonable person situated in 2011 would have foreseen, rather than being ‘clouded by hindsight’11.

Counsel for both sides put forth arguments. Jonathan Seitler QC, representing the EMA, said “Brexit was not an event that the parties could have seen as a real possibility” when the parties agreed in 2011. “The coalition government had reaffirmed its commitment to the EU at the time of the agreement in 2011.” Accordingly, an unforeseen event more likely to give rise to frustration as it is impossible on that basis for implication of allocation of risk to arise (per The Sea Angel12). However, Joanne Wicks QC for Canary Wharf argued that the existence of Article 50 of the Lisbon Treaty meant that it was always lawfully possible for the UK to invoke A.50 and leave the EU. Additionally, the possibility of Brexit had been the subject of “potent political debate” before 2011.

Prima facie, it seems hard to think that the EMA and Canary Wharf Group had foreseen, or even contemplated the possibility of a British exit from the EU. However, it is noted that any conclusions at this stage is preliminary, and it would be interesting to see what evidence that counsel in Canary Wharf v EMA would adduce. Perhaps, more weight should be placed on the radicality in the change in obligations of the contract. We refer to Rix LJ in The Sea Angel13:

“In a sense, most events are to a greater or lesser degree foreseeable. That does not mean that they cannot lead to frustration. Even events which are not merely foreseen but made the subject of express contractual provision may lead to frustration: as occurs when an event such as a strike, or a restraint of princes, lasts for so long as to go beyond the risk assumed under the contract and to render performance radically different from that contracted for.”

It is noted that the converse is also true – even if Brexit was unforeseeable, the EMA can still fail in its claim if there was not a radical change in its obligations. Arguably, it is likely that there would not be a radical enough change in obligations.

(ii) Radical change:

This is where the EMA faces its biggest hurdle. We look towards analogous examples of frustration and leases that have been argued in court:

  • government expropriation of land in BP Exploration v Hunt (No 2)14. The Gaddafi government nationalised half of BP’s share, and that was argued to be frustration, which the House of Lords upheld.
  • legislation which permanently prohibited building on the site, in Cricklewood Property and Investment Trust Ltd15, held not to be frustration.
  • governmental prohibition or prevention of the use contemplated by the lease in National Carriers Ltd16. The sole means of accessing the warehouse was via a road was closed by the local authority for 20 months, and that was argued to be a frustrating event, which the House of Lords rejected.

The cases draw a high threshold for frustration of a lease, where there has to be some sort of total destruction or elimination of the land in the lease, anything less than that would not amount to a radical enough change. Particularly, Lord Wilberforce in National Carriers is instructive:

“The closure would probably last for a year or a little longer. In fact it seems likely to have lasted for just over 18 months. Assuming that the street is reopened in January 1981, the lease will have three more years to run. My Lords, no doubt, even with this limited interruption the appellant’s business will have been severely dislocated. It will have had to move goods from the warehouse before the closure and to acquire alternative accommodation. After reopening the reverse process must take place. But this does not approach the gravity of a frustrating event. Out of 10 years it will have lost under two years of use: there will be nearly three years left after the interruption has ceased. This is a case, similar to others, where the likely continuance of the term after the interruption makes it impossible for the lessee to contend that the lease has been brought to an end. The obligation to pay rent under the lease is unconditional, with a sole exception for the case of fire, as to which the lease provides for a suspension of the obligation. No provision is made for suspension in any other case: the obligation remains. I am of opinion therefore that the lessee has no defence to the action for rent, that leave to defend should not be given and that the appeal must be dismissed.” (emphasis added)

Even where there was no usage of the land or tenancy for a part of the tenancy period, the lease itself does not end for frustration. In the preliminary hearing for Canary Wharf v EMA, the EMA argued that there was a change such as to render the commercial venture futile, raising the Davis Contractor and Coronation cases. In American prohibition cases, leases can only be frustrated if the whole expected purpose of the lease for the liquor store – to sell liquor – was eliminated fully17.

Only in very specific contexts, can the commercial venture of the lease be rendered futile. For EMA to successfully argue that the commercial venture had been rendered totally futile, it would have to be shown that the common contractual intention was for the EMA to conduct business in the UK, and only or largely for the reason that the UK was part of the EU, and that this purpose was one that ‘gave to the premises a large part of its rental value’. Also, the scope of the commercial venture could extend beyond the objective of a lease- it can include much more than just the party to the agreement actually operating in the building under the lease. Great reliance must be placed on the idea that the EMA can avoid most or all of its financial losses by assigning the lease or subletting the lease.

Additionally, the contractual negotiations and the absence of a break clause would support Canary Wharf Group’s argument that there had been a contemplation of the risks, and that the risks were placed on the EMA, and accordingly, there was no radical change in obligations. Monika Hohlmeier, a German MEP in charge of the Parliament’s position on the EMA lease back in 2011 noted that “I asked the Commission and Council to include an exit clause in the contract, especially since every other EU agency has one, but both institutions refused to do so”18. Thom Wilkinson, property partner at Monro Wright & Wasbrough19, notes that the exclusion of a break clause, could reflect the negotiation between the EMA and Canary Wharf, in that the expense of the custom-built specifications for EMA’s space required Canary Wharf to exclude the break clause to ensure a confident return on its investment. Additionally, the absence of a break clause could have been part of the matrix of negotiations, that concluded the final price, and that included a discount where the EMA paid no rent for the first three years.

We refer to the helpful analysis by Lord Simon in National Carriers:

“Judging by the drastic increase in rent under the rent review clause (more than doubled), it seems likely that the appellants’ occupation towards the end of the first quinquennium must have been on terms very favourable to them. The parties can hardly have contemplated that the expressly-provided-for fire risk was the only possible source of interruption of the business of the warehouse– some possible interruption from some cause or other cannot have been beyond the reasonable contemplation of the parties. Weighing all the relevant factors, I do not think that the appellants have demonstrated a triable issue that the closure of the road so significantly changed the nature of the outstanding rights and obligations under the lease 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.” (emphasis added)

Accordingly, it submitted that EMA’s claim must fail. It is noted unfortunately, that the Brexit conundrum continues for non-lease contracts in different contexts. One can imagine the uncertainty that lawyers face when dealing with frustration in non-lease contracts, of which there could be many such claims post-Brexit.

Conclusion

As Lord Mansfield proclaimed in Vallejo v. Wheeler20 almost one and a half centuries ago – certainty is ‘the great object’ of mercantile law. Unfortunately, Brexit throws a spanner in the works of the achievement of such an object It is still hoped that this article will shed light on the developing problems in the realm of commercial contracts, and provide enterprising students with a more interesting answer to the perennial ‘implications-of-Brexit’ question in vacation scheme interviews.

1. Canary Wharf (BP4) T1 Limited and others v European Medicines Agency, High Court of Justice, Business and Property Courts, Case No. PT-2018-000505

2. Davis Contractors Ltd v Fareham Urban District Council [1956] UKHL 3

3. European Medicines Agency. (2018, March 5). New tracking tool for EMA’s relocation to Amsterdam. Retrieved from European Medicines Agency: https://www.ema.europa.eu/en/news/new-tracking-tool-emas-relocation-amsterdam

4. Quinn, A. (2018, July 26). European Drug Agency Fights $660-Million Rent Bill After Brexit.Retrieved from Bloomberg: https://www.bloomberg.com/news/articles/2018-07-26/european-drug-agency-fights-660-million-rent-bill-after-brexit

5. Right for a firm registered in the European Economic Area to do business in any other EEA state without needing further authorization in each country.

6. Katz, B.D. (2018, September 24). U.K. Warns Flights May Be Grounded in Case of No-Deal Brexit. Retrieved from Bloomberg Business: https://www.bloomberg.com/news/articles/2018-09-24/u-k-warns-flights-could-be-grounded-in-case-of-no-deal-brexit; and Leggett, T., & Bowler, T. (2018, July 5). No-deal Brexit ‘could ground aircraft’. Retrieved from BBC News: https://www.bbc.co.uk/news/business-44725606

7. National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675

8. Islamic Republic of Iran Shipping Lines v Steamship Mutual Underwriting Association (Bermuda) Ltd (Rev 1) [2010] EWHC 2661 (Comm) (26 October 2010)

9. Thomas, J. (2018, October 2). Judge requests time capsule of submissions to assess EMA Brexit lawsuit.Retrieved from Getting the Deal Through : https://gettingthedealthrough.com/pharma/article/6381/judge-requests-time-capsule-submissions-assess-ema-brexit-lawsuit

10. Treitel on the Law of Contracts, Sweet & Maxwell; 12th edition (July 24, 2007)

11. Thomas, J. (2018, October 2). Judge requests time capsule of submissions to assess EMA Brexit lawsuit.Retrieved from Getting the Deal Through : https://gettingthedealthrough.com/pharma/article/6381/judge-requests-time-capsule-submissions-assess-ema-brexit-lawsuit

12. Edwinton Commercial Corporation & Anor v Tsavliris Russ Ltd, The Sea Angel (2007) 2 LLR 517

13. Ibid.

14. BP Exploration Co (Libya) Ltd v Hunt (No 2) [1983] 2 AC 352

15. Cricklewood Property and Investment Trust Ltd v Leighton’s Investment Trust Ltd [1945] AC 221

16. National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675

17. Mentioned by Lord Wilberforce in National Carriers

18. Collis, H., Paun, C., & Paravicini, G. (2017, 4 28). How the EU trapped itself into a no-break lease in Britain.Retrieved from Politico: https://www.politico.eu/article/how-the-eu-trapped-itself-into-a-no-break-lease-in-britain/

19. Ibid.

20. Vallejo v. Wheeler (1774) 1 Cowp 143, 153