Can Brexit frustrate a commercial contract?

The effect of Brexit on commercial contracts has been the subject of much debate, and the direct legal implications of Brexit on commercial contracts governed by UK law is unclear. Since June 2016, some parties entering into commercial agreements have included a so-called ‘Brexit clause’, which sets out in express terms how Brexit could impact the contract in question. Where no such clause has been included in a contract, however, there is a risk that Brexit will have a disruptive effect. Following the recent High Court decision in Canary Wharf v European Medicines Agency (EMA) [2019], it now seems unlikely that the parties to a commercial agreement will be able to rely on the doctrine of frustration where one or both are unable to fulfil their obligations as a result of Brexit.

In this recent case, the High Court held that if the UK departs from the EU, this departure will not have the effect of frustrating a 25-year commercial lease of premises in Canary Wharf. Neither the UK’s transition from member state of the EU to third country, nor the EMA’s shift of headquarters away from London as a result of Brexit, will constitute a frustrating event. The EMA would therefore remain obliged to perform its obligations under the lease.

The High Court considered a number of specific arguments based on the doctrine of frustration, which provides that if a frustrating event occurs, and the parties are no longer bound to perform their contractual obligations, then the contract is automatically discharged. As a matter of case law, grounds of frustration would include the occurrence of an unforeseen event, which takes place after the formation of the contract, and which renders it physically or commercially impossible or illegal to fulfil the contract, or which transforms the obligation to perform into a radically different obligation from that undertaken at the moment of entering into the contract (for example, the physical destruction of the premises in the case of a lease). The court’s approach is to take into account all facts and circumstances of the case in question.

The EMA argued that its lack of capacity to operate in the UK once the UK leaves the EU would frustrate the lease by reason of supervening illegality. The EMA also argued frustration of a common purpose. Both of these arguments failed; the first because the Court held that there were no legal reasons for the EMA not to remain in the UK (although there were strong political reasons), and the second because the Court held that outside the lease there was no common purpose between the parties.

Past case law has shown that the doctrine of frustration is construed narrowly by the courts, and this case is no exception. The EMA ruling goes some way towards providing certainty to UK landlords who may fear that international tenants could have potentially argued, successfully, that the fact of Brexit would frustrate their lease. It should also give comfort in general to UK businesses in relation to Brexit, with regard to all types of commercial contracts, in circumstances where Brexit may cause the counterparty to be unable to fulfil its obligations, and no so-called ‘Brexit clause’ has been included in the contract.

However, note that Canary Wharf can seek leave to appeal until 29 March 2019. Watch this space…

Can Brexit frustrate a commercial contract?

The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.

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