The law can be frustrated over Brexit problems too – Stephen Cotton

Stephen Cotton is a Partner at Wright, Johnston & Mackenzie LLP.
Stephen Cotton is a Partner at Wright, Johnston & Mackenzie LLP.
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David Cameron first announced an in/out referendum would be part of the future Tory manifesto on 23 January, 2013. Whether he ever expected to have to deliver on that undertaking is a matter for him – but few of us expected either a Tory overall majority in the 2015 General Election or the June 2016 EU referendum to result in a vote to leave. In short, we were surprised.

Non-lawyers may also be surprised to hear that, in contract law, frustration has nothing to do with teenage lust or relationship angst. It is about surprises (the law calls them supervening events) that crop up after the parties put pen to paper and bind themselves to perform their contract. Generally, with business to business (B2B) contracts, the law can be pretty unforgiving in such a situation and, broadly, courts expect the parties to have assessed and priced in the risks and to honour the contract they agreed.

There are, however, exceptions. One potential escape route concerns the concept of the contract having been ‘frustrated’ by supervening event(s). In 1956, in a case called Davis Contractors Ltd v. Fareham UDC, Lord Radcliffe framed the following general test for frustration, which has stood the test of time: “…frustration occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. Non haec in foedera veni. It was not this that I promised to do.”

It was with this in mind that, having entered into a 25-year lease with The Canary Wharf Group in 2014 (but on the basis of an earlier agreement to lease dated 2011), the European Medicines Agency (EMA) sought to argue that, once the UK leaves the EU, its lease will have been frustrated by a supervening event (UK departure from the EU). On the issue of whether this should have been known to or foreseeable by EMA, the circumstances the judge considered were those back in 2011 (so David Cameron cannot really be blamed in this regard).

In a complex judgment running to 259 paragraphs, and issued on 20 February, Mr Justice Marcus Smith refused to refer various preliminary questions to the European Court of Justice, and held that there was nothing to stop an EU entity (EMA) having its office in a third state (the UK) post-Brexit nor to retrospectively invalidate its agreement to the lease.

On the issue of frustration, the judge rejected the argument that there had been a supervening illegality after the contract was entered (in essence Brexit if it happens) and that the court should have regard to the EU laws under which EMA was incorporated. He felt that, whilst European Union law might have been relevant to the capacity of the EMA to enter into the Lease in 2011/14, it was not relevant to EMA’s continuing obligation to perform nor to the question of whether any subsequent illegality had caused the Lease to be frustrated.

He rejected another frustration- based argument that, in short, the so-called common purpose of the parties would disappear on Brexit: “Outside the terms of the Lease, the parties’ purposes were not common, but divergent. The EMA was focussed on bespoke premises, with the greatest flexibility as to term, and the lowest rent. CW was focussed on long-term cash flow, at the highest rate, and was prepared to allow the EMA its say in the building’s configuration, provided that this was not adverse to CW’s interests.”

It is, however, worth noting that the case (which, given the sums at stake, is likely to be appealed) contains no sweeping statement that other B2B contracting parties cannot argue frustration as a result of some aspect of Brexit. Therefore, someone with a longer term contract (a) pre-dating say Mr Cameron’s undertaking in 2013 or even the EU referendum in 2016 and (b) facing a radically different set of circumstances as a result of Brexit would be well-advised to have the contract reviewed by their lawyers.

Additionally, and to state the obvious, anyone looking at a new contract should also seek legal advice on the impact of Brexit. As the 14th century manuscript (Ms. Douce), now housed in the Bodleian Library at Oxford advises: “Look before you leap.”

Stephen Cotton is a partner at Wright, Johnston & Mackenzie LLP.