Archive for the ‘frustration’ Category

Frustration of leases: Brexit and illegality

April 23, 2019

Introduction

This is the second post about Canary Wharf (BP4) T1 Ltd v European Medicines Agency ([2019] EWHC 335) in which 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.

The first post outlined the facts and Marcus Smith J’s account of the doctrine of frustration. This post looks at the EMA’s argument that performing its obligations under the lease would be illegal after Brexit and that the lease was frustrated on that account.

The EMA’s argument on 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]).

Essential points about supervening illegality

The earlier post outlined Marcus Smith J’s account of the law on supervening illegality. Briefly:

  • illegality arising under foreign law does not frustrate a contract;
  • ‘for supervening illegality to frustrate, it must remove all or substantially all of the benefit that one party receives from the contract.’ ([195])
  • the frustration must not be self-induced.

Assumptions favourable to the EMA’s case

Marcus Smith J. assessed the EMA’s case on the following assumptions:

  • that illegality under foreign law was relevant to frustration under English law;
  • that, following Brexit, it was ultra vires the EMA, and therefore illegal, for it to continue to perform its obligations under the lease.

London and Northern Estates Company v. Schlesinger

Marcus Smith J referred to the Court of Appeal decision in London and Northern Estates Company v. Schlesinger ([1916] 1 KB 20) where an Austrian subject took a lease of a flat. When war broke out, restrictions were introduced prohibiting enemy aliens from living in the area in which the flat was located. The Court of Appeal held that this supervening illegality did not frustrate the lease.

Marcus Smith J commented:

‘the primary basis for the decisions of Avory and Lush JJ is illuminating: for supervening illegality to frustrate, it must remove all or substantially all of the benefit that one party receives from the contract. Thus, Avory and Lush JJ both stressed that not only did the lease continue, but also that the defendant was entitled to sub-let or indeed lend the flat to his friends. In short, the fact that the defendant was himself precluded from occupying the flat was not nearly enough to render the lease frustrated.’ ([195])

Application to this case

If it were accepted that the supervening illegality deprived the EMA of any ability to use the premises then the lease would be frustrated. For this to be true, it would need to be the case that it was ultra vires the EMA to occupy, assign, sub-let or share possession of the property ([198] – [199]). The lease would also be frustrated if it were assumed that EMA’s payment of the rent was ultra vires ([200]). Making these assumptions (and that illegality under foreign law is relevant) then Brexit did frustrate the lease.

Self-induced frustration

Even if the supervening illegality did frustrate the lease it is still relevant to ask whether the frustration is self-induced.

Marcus Smith J explained:

‘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])

Here the frustration was self-induced:

‘(3) The fact is – as evidenced by the provisions of the Withdrawal Agreement – that the European Union could have done more than simply baldly ordering the relocation of the EMA (by way of the 2018 Regulation) and focussing only on the progress of the establishment of the EMA’s new headquarters in Amsterdam (which is what the 2018 Regulation does). The 2018 Regulation could have gone further, regarding the winding down of the EMA’s position in the United Kingdom. It could, for example, have included provisions along the lines of Article 119 of the Withdrawal Agreement.’ ([206])

The EU’s failure to confer capacity on the EMA to make use of the right to assign or sub-let the lease was a choice that it had made. It was this choice that gave rise to such illegality as existed. The lease is not frustrated by this illegality ([207]).

Michael Lower

 

 

 

 

Brexit and the doctrine of frustration

March 31, 2019

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

 

Frustration of a contract for the sale of a flat

January 7, 2011

A contract for the construction and sale and purchase of an apartment is frustrated where some event not contemplated by the parties and not provided for in the contract makes performance of the contractual obligation radically different from that which the parties had contemplated at the time of the contract.

Wong Lai-ying v Chinachem Investment Co Ltd ([1980] HKLR 1, PC) concerned contracts under which a developer agreed to build flats within an agreed time-scale and then to sell undivided shares to the purchasers. A major landslip occurred. It was unforeseeable and delayed works at the site. They were completed more than two years after the latest possible time contemplated by the sale agreements. The foundations that had to be built were very different from those that had originally been contemplated. The Privy Council agreed with the Hong Kong Courts that the landslip was an event that frustrated the sale agreements. In the language of Lord Radcliffe in Davis Contractors v Fareham UDC ([1956] AC 696), performance of the contractual obligation had become radically different from that which was undertaken by the contract.

The doctrine of frustration and leases: National Carriers Ltd v Panalpina (Northern) Ltd

September 19, 2010

It had been thought, since the English Court of Appeal decision in Leighton’s Investment Trust Ltd v Cricklewood Property and Investment Trust Ltd ([1943] KB 49), that the doctrine of frustration did not apply to leases. In National Carriers Ltd v Panalpina (Northern) Ltd ([1981] AC 675), the House of Lords confirmed that the doctrine does apply to leases.

The doctrine of frustration applies when, after a contract has been entered into, some supervening event occurs that makes performance of the contract radically different from what the parties had contemplated when they entered into the contract.

National Carriers concerned a 10 year lease of a warehouse. The lease only allowed the building to be used as a warehouse. The local authority closed the only road leading to the warehouse for 20 months. This meant that the warehouse was useless to the tenants for that time.

The tenants sought to invoke the doctrine of frustration. They argued that the closure of the road and its effect on the contemplated use of the property brought their case within the doctrine.

The majority of the House of Lords decided that the doctrine was, in principle, as applicable to leases as to any other contract.

Lord Wilberforce explained that there were two issues of principle to be considered:

1. was the fact that the lease created an estate in land a barrier to the applicability of the doctrine? He thought not. In principle, events can occur that might lead to the estate in land coming to an end. And there might be many leases where it was clear that the parties have a mutually contemplated purpose (such as use as a warehouse) That purpose could be frustrated by the occurrence of a supervening event.

2. Do all risks pass to a tenant when a lease is entered into? Lord Wilberforce thought that there was no general principle to that effect.

Lord Russell of Killowen gave the only dissenting judgment. He pointed out that land is indestructible and that this fact makes the doctrine of frustration inapplicable to leases. He was also of the view that all risks pass to the tenant when a lease is entered into.

In any event, the tenant failed: the loss of 20 months out of a 10 year term was held not to be serious enough to fall within the doctrine of frustration.