Brexit update: Judgment on contractual duties in case of an unregulated withdrawal

Judgment by England's High Court

At the beginning of the year, we reported on the impact which an unregulated withdrawal of the United Kingdom (UK) from the European Union (EU) would have on existing contracts (reuschlaw News). That report concerned the question of which rights contracting parties would have to adjust, terminate or rescind their agreements in case of adverse effects as a result of an unregulated withdrawal ("hard Brexit").

In accordance with English law, the "doctrine of frustration" may apply in this case under certain circumstances. This doctrine applies if an event occurs which was unforeseeable at the time the agreement was concluded ("frustrating event") which renders it impossible to perform the agreement, or which radically alters the contractual duties. The consequence of the "doctrine of frustration" is the immediate cessation of the agreement.

An English court has now considered the question as to whether the impact of an unregulated Brexit would constitute a "frustrating event."

Background

The background was a pending case before the court between Canary Wharf (BP4) T1 Ltd. (hereinafter, "CW") and the European Medicines Agency (EMA). In 2011, the parties signed a lease agreement for a building in London which was built by CW and to which the EMA moved its headquarters upon completion. After the United Kingdom voted to leave the EU, the EMA notified CW that Brexit (if and when it occurs) constitutes a "frustrating event," so that the lease agreement was automatically ended. The reason for this notification was that the lease agreement was to remain in effect through 2039 with no option for termination, while the EMA is a European agency which is required to maintain its headquarters within the EU. As a result, it would have to move its headquarters from London to the EU once Brexit takes place. The EMA argued that the intended purpose of the agreement (use of the building as a headquarters) would therefore cease to exist in the event of Brexit. CW responded by seeking a declaratory judgment that the impact of Brexit would not constitute a "frustrating event."

The court's decision

The English High Court agreed and found that the impact of (a hard) Brexit cannot be classified as a "frustrating event" in this case.

The court stated that the need to relocate its headquarters would not affect performance of the EMA's duty as lessee (payment of the rent). Even if continuation of the lease were impossible under applicable EU law, the court found that the lease would still be unaffected because EU law is foreign law (after Brexit, at least) and therefore has no impact on contracts which are lawfully concluded under English law.

The High Court also commented on whether the loss of the contractual purpose intended by the parties upon conclusion of the agreement would be enough to trigger "frustrating event." The court found that this was the case, since the agreement contained no indications of an intended purpose. In fact, the court noted that the parties had expressly provided for a possible alternative use of the building during the term of the lease, specifically subletting the building.

Impact in practice

This judgment is not directly applicable to other cases, and the proceedings have yet to be concluded, due to the fact that the judgment is still open to appeal. However, it is evident that the hurdle which must be cleared for occurrence of a "frustrating event" is very high and that strong arguments will need to be presented in support of such an allegation. It is will be necessary in this regard to consider the circumstances of each individual case.

In order to avoid having to rely on the occurrence of a "frustrating event," all future agreements which are concluded up until Brexit takes place should include a clause (e.g. a hardship or force majeure clause) which allows the contracting party to adapt or terminate the agreement if Brexit occurs. In case of existing agreements which do not contain such a clause, an examination should be made as to whether provisions already exist with regard to the impact of an unregulated Brexit (customs, import duties and delays in delivery), and if so, which.

[June 2019]