In Canary Wharf (BP4) T1 Ltd v European Medicines Agency, Marcus Smith J issued a declaration that a commercial lease between the European Medicines Agency (EMA) and its landlords would not be frustrated by the UK’s withdrawal from the EU.
The claim began under CPR 8, but was reclassified by Smith J at a case management conference as a CPR 7 claim, who ordered it to continue as if commenced under CPR 7. Smith J observed that the matter had effectively been dealt with by way of a bespoke hybrid procedure:
“… the reality, however, is that the claim lies somewhere on the spectrum between CPR Part 8 and CPR Part 7. As a result, there was limited disclosure and limited cross-examination of the factual witnesses.”
The defendant, the EMA, is an agency of the European Union, which holds an underlease (the lease) of part of 25-30 Churchill Place, Canary Wharf (the property). The claimants were the landlords and management company for the Canary Wharf estate (CW). The parties had agreed a 25 year lease in 2014. By letter dated 2 August 2017, the EMA wrote to CW stating that:
“Having considered the position under English law, we have decided to inform you that if and when Brexit occurs, we will be treating that event as a frustration of the Lease.”
The doctrine of frustration operates to bring a contract prospectively to an end because of the effect of a supervening event. In order to resolve the commercial uncertainty of the position, CW commenced proceedings under Part 8, seeking:
“… a declaration that the withdrawal of the United Kingdom from the European Union and/or the relocation of the [EMA] (whether inside or outside of the United Kingdom) will not cause [the Lease] to be frustrated and that the [EMA] will continue to be bound by all of its covenants and obligations in the Lease and all related documents including (but not limited to) payment of the full rents under the Lease throughout the Term of the Lease unless released by law upon a lawful assignment of the Lease properly made in accordance with its terms…”
Notably, by an order dated 2 August 2018, Mann J directed that (so far as practicable) the proceedings should be heard, and preferably judgment delivered, by 29 March 2019 (which was of course, at the time, exit day). Smith J tactfully observed that:
“At the time of writing this judgment, matters are in a state of flux and it is impossible to say – and certainly not for a judge to speculate – what will be the position on 29 March 2019.”
Given that, as Smith J noted, it was not possible to “wait and see” what would happen as to how the UK would withdraw from the EU (if at all), he proceeded to determine the matter on the basis that the UK would leave the EU on 29 March 2019 without ratifying the withdrawal agreement:
“That is not because of any assessment of the probabilities between the various scenarios (on which I have no authority to speak and about which I say nothing) but because this is most likely to produce an answer that will be helpful to the parties on the question of frustration generally.”
In any event, Regulation (EU) 2018/1718 of the European Parliament and of the Council of 14 November 2018 (2018 Regulation) which “shall apply from 30 March 2019”, prescribes that “the EMA shall have its seat in Amsterdam, the Netherlands” rather than London.
The parties’ frustration arguments
In short, the thrust of EMA’s position was summarised as follows:
“It would be unprecedented and incongruous for an EU body such as the [EMA] to be located in the UK and continue to pursue its mission in London after the UK has left the EU. Such circumstances were simply not contemplatable at the time of entering into the Lease.”
It was the actual occasion of the withdrawal of the UK from the EU that was, in the EMA’s submission, the event which would frustrate the lease (and not simply the ongoing general Brexit uncertainty). The EMA argued that the Brexit would trigger a number of legal changes relating to the EMA’s legal capacity to continue with the lease (in particular, due to the 2018 Regulation). The EMA contended that, after Brexit, as a matter of law, neither it, nor any other agency of the EU, could use the lease, nor would it have the power to meet its future obligations under the lease.
CW’s primary case was that none of the frustrating grounds could amount to a frustrating event because Brexit or the relocation of the EMA away from London could not (whatever the consequences) amount to an event capable of frustrating the lease.
EMA made a further argument, referred to by Smith J as its “self-standing point”. The essence of which was that if the lease is not frustrated, then as a matter of self-standing EU law, the court is required to fashion a remedy to give effect to EMA’s contended lack of power to maintain its obligations under the lease.
Smith J’s analysis
Smith J summarised the “prevailing wisdom” accumulated in the authorities, which he considered best encapsulated the doctrine of frustration:
“Whether a contract is frustrated depends upon a consideration of the nature of the bargain of the parties when considered in the light of the supervening event said to frustrate that bargain. Only if the supervening event renders the performance of the bargain “radically different”, when compared to the considerations in play at the conclusion of the contract, will the contract be frustrated.”
First, Smith J held that the lease was not frustrated by supervening illegality. Smith J was not persuaded that the EMA lacked the capacity or vires to continue the performance of its obligations under the lease. However, he considered that even if the EMA did lack the capacity to continue performance by reason of supervening illegality under EU law, that was not a matter that the English law of frustration would have regard to.
Smith J nonetheless proceeded to consider whether, if he was wrong as to those conclusions, what his alternative analysis would be. Perhaps somewhat surprisingly, he considered that the frustration would be self-induced on the part of the EMA (given its constitutional context within the EU). He expressed the view that the EU could have done more than “simply baldly ordering the relocation of the EMA (by way of the 2018 Regulation).” Smith J concluded that the legal effects on the EMA of the Brexit could have been, but were not, ameliorated by the EU.
Secondly, Smith J also concluded that the lease was not frustrated by the failure of a common purpose. Whilst Smith J concluded that Brexit was not relevantly foreseeable when the agreements were entered into, he did not consider that the common purpose failed. This was because his conclusion was that the common purpose never amounted to a mutual contemplation that one of the purposes of the lease was to provide a permanent headquarters for the EMA for the next 25 years and that if that could not be achieved, the common purpose of the lease had failed.
Smith J’s judgment was therefore that the lease would not be discharged by frustration on the UK’s transition from member state of the EU to third country status, and nor did the EMA’s shift of headquarters from London to Amsterdam constitute a frustrating event. The EMA remained obliged to perform its obligations under the lease.
Smith J gave the “self-standing point” relatively short thrift, concluding that the express terms of the European Union (Withdrawal) Act 2018 rendered it unarguable. This was because, pursuant to that Act, no new propositions of EU law would be incorporated into UK law post-exit day.
Implications for Brexit-threatened contracts
In Canary Wharf (BP4) T1 Ltd v European Medicines Agency, Smith J acknowledged that Brexit is a “seismic event”. However, it was not a frustrating event. This judgment has kept the doctrine of frustration to its traditionally narrow scope, and it will not rescue parties whose contractual agreements may have been drastically compromised by an impending Brexit.
Looking forward, Smith J noted that:
“These days, and for the last two or so years, parties to contracts have no doubt been considering with some care what their contracts should say as regards the United Kingdom’s withdrawal from the European Union. Thus, the failure of the parties to a contract, post-referendum, to consider the inclusion of a “Brexit clause”, might be considered relevant to the allocation of risk. But, as Ms Summerfield has pointed out, the first time the withdrawal of the United Kingdom was considered by DLA Piper in the context of real estate transactions was in 2016, and it was at about this time that “Brexit clauses” began to be considered. This is well after the Agreements.”
Given Smith J’s warning about how the absence of a “Brexit clause” in an analogous post-referendum contract might appear, and in light of the ongoing uncertainty (without diminishing the difficulty of the task), contracts should be carefully drafted so as to allocate the plethora of risks inherent in the ongoing Brexit process as best as possible on an agreement-by-agreement basis.