Brexit and the doctrine of frustration

Introduction

In Canary Wharf (BP4) T1 Ltd v European Medicines Agency ([2019] EWHC 335) Marcus Smith J considered the claim of the European Medicines Agency (‘the EMA’) that Brexit (should it occur) would be an event that would frustrate the EMA’s lease of its office premises in Canary Wharf.

Marcus Smith J first considered the juridical basis of the doctrine of frustration. He then  considered whether either a ‘No Deal Brexit’ or Brexit under the terms of the Withdrawal Agreement negotiated between the British Government and the European Union would frustrate the lease.

This blog post outlines the general discussion of the law of frustration. A second blog post will look at how Marcus Smith J. applied the law to the facts of this case.

Brief outline of the facts of the case

Canary Wharf granted EMA a lease of office premises in Canary Wharf (‘the premises’) for a term of 25 years from 21 October 2014. The EMA could assign or sub-let the premises, subject to compliance with the provisions in the alienation clause in the lease.

The EMA wrote to Canary Wharf on 2 August 2017 informing Canary Wharf that, ‘when Brexit occurs, we will be treating the event as a frustration of the lease’. Canary Wharf sought a declaration that Brexit (the withdrawal of the United Kingdom from the European Union) would not cause the lease to be frustrated.

The doctrine of frustration

‘The doctrine of frustration operates to bring a contract prospectively to an end because of the effect of a supervening event’ ([21]).

While there is no numerus clausus of frustrating event, they include:

  • frustration of a common purpose; and
  • subsequent legal changes and supervening illegality ([41])

Frustration of a common purpose

The essence of the doctrine is that a contract is frustrated when performance would be ‘radically different’ from what the parties had envisaged ([27]; Davis Contractors v Fareham UDCNational Carriers v Panalpina).

The search then is for what the parties have promised and whether performance would fall within the scope of their promises. Contractual interpretation is highly relevant to the question of whether a supervening event means that performance goes beyond what has been promised. Many disputes will turn out to be about contractual interpretation.

In frustration cases, however, the search is for ‘something much more elemental’ which can be described as the parties’ ‘common purpose’ ([29]).

In Edwinton Commercial Corporation v Tsavliris Russ (Worldwide Salvage & Towage) Ltd
(The “Sea Angel”),
Rix LJ said:

‘In my judgment, the application of the doctrine of frustration requires a multi-factorial approach. Among the factors which have to be considered are the terms of the contract itself, its matrix or context, the parties’ knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of contract, at any rate so far as these can be ascribed mutually and objectively, and then the nature of the supervening event, and the parties’ reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances    …. there has to be as it were a break in identity between the contract as provided for and contemplated and its performance in the new circumstances’ ([111]).

This multi-factor approach (in particular the third factor) goes beyond what would be relevant if the question were purely one of contractual interpretation.

Marcus Smith J. refers to Krell v Henry to illustrate the sort of case in which the parties could have been said to have a common purpose underlying their contract:

‘Their common purpose was just that: whilst the parties surely would have been in opposition in bargaining on price, the thing that they were bargaining about was predicated on the procession taking place. Matters would have been very different had the room been a hotel room charging a higher rate because of the higher demand for rooms on that particular day due to the Coronation.’ ([37]).

The ‘demands of justice’ are a factor:

‘If the provisions of a contract in their literal sense are to make way for the absolving effect of frustration, then that must, in my judgment, be in the interests of justice and not against those interests’ (Edwinton Commercial Corporation v Tsavliris Russ (Worldwide Salvage & Towage) Ltd (The “Sea Angel”) at [112]).

Subsequent legal changes and supervening illegality

Marcus Smith J explained that:

‘The EMA’s contention that the Lease was frustrated by supervening illegality, taken at its highest, involved the proposition that, after withdrawal of the United Kingdom from the European Union, it would no longer be lawful for the EMA to pay rent to CW pursuant to the Lease. The payment of rent would be unlawful because the EMA would – in paying rent – be acting ultra vires or without capacity’ ([96]).

Outlining the relevant law, he noted that:

‘Supervening illegality means more than simply Patel v. Mirza type illegality: it can arise where the performance of a contract becomes unlawful for one party by reason of a supervening change in law or by reason of a supervening change of circumstance rendering that which was previously lawful unlawful’ ([170]).

Where the illegality is the result of a foreign law

Marcus Smith J. considered the EMA’s case on the assumption that it had made out its case that the payment of rent would be ultra vires the EMA. This illegality would arise from EU law:

‘This is a case where the supervening illegality arises under a foreign law that is not the applicable law. Generally speaking, the validity and enforceability of a contract governed by English law is not as a general rule affected by the question whether the contract would be regarded as valid or whether its performance would be lawful according to the law of another country. The English law of frustration discounts illegality arising under a foreign law, save for certain limited exceptions.’ ([187])

Thus:

‘The question, then, is whether – assuming that the EMA is right as regards the points it makes on vires – these are relevant for the purpose of frustration by way of supervening illegality. The question is whether the English law of frustration, which has regard to questions of legality where the performance of the contract would be unlawful according to the law of the place of performance, should also have regard to the law of incorporation, at least where this affects the capacity of a party to continue to perform obligations under a transaction lawfully entered into by it.’ ([188])

Marcus Smith J. declined to extend English law in this way ([189]).

What if performance was ultra vires and this was relevant in English law?

Even if the EMA had succeeded on supervening illegality thus far, that would not be the end of the analysis:

‘for supervening illegality to frustrate, it must remove all or substantially all of the benefit that one party receives from the contract.’ ([195])

Self-induced frustration

‘Self-induced frustration’ does not frustrate the contract:

’43 Of the five propositions identified by Bingham LJ in The Super Servant Two as not open to question, two might be said to relate to self-induced frustration:
(1) Proposition 4, that frustration should not be due to the act or election of the party seeking to rely on it; and
(2) Proposition 5, that the frustrating event must take place without blame or fault on the side of the party seeking to rely upon it.

44 Whether frustration is self-induced does not turn on technical questions of duty of care or fault.’

Marcus Smith J. said:

‘When considering whether there has been a frustrating event, it is quite clear that the courts consider the conduct of the party alleging frustration broadly and ask the broad question of whether the supervening event was something beyond that party’s control or within it. “Self-induced frustration” is something of a misnomer. It is simply a reference to post-contractual events and actions which indicate that certain options – that might have ameliorated the frustrating event – have been closed off by the acts or omissions of the party claiming frustration.’ ([206]).

Next posts

The judgment in this case is long, detailed and closely-argued. This post describes the relevant legal principles as articulated in the judgment. Subsequent posts will describe how the law was applied to the facts of this case.

Michael Lower

 

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