Brexit may frustrate you, but will it frustrate a contract?

The effect that Brexit may have on commercial contracts is unclear at present; the commercial implications will ultimately be determined by the terms upon which the UK leaves the EU.  In any Brexit scenario, organisations are likely to face some economic and commercial repercussions in respect of cross-border arrangements they are involved in.  For example: there could be changes to the tariff rates on goods and services provided to and from the EU (as well as other countries); customs checks may be needed for goods entering and leaving the EU; there could be a shortage of labour and/or resources…the list goes on (and on and on in the case of Project Fear).

UK organisations seeking to enter into cross-border arrangements should carefully consider the arrangement and assess the extent to which it is “Brexit-proof” before signing on the dotted line; it may not be possible to look into a crystal ball in order to determine all possible scenarios (and I suspect even the crystal ball has given up the ghost insofar as Brexit is concerned), but some key points to consider include:

  • The addition of a “Brexit clause” that permits the parties to review elements of the contact and/or to terminate the contract on the occurrence of a trigger event that the parties predict may arise from Brexit.
  • Whether any territorial references to the EU, EU law or EU institutions should be expanded to include the UK.
  • How long the parties are tied in for - can the contract be terminated on short notice?
  • Which party bears the risk of fluctuations in exchange rates and which party is responsible for paying any tariffs and for customs clearance (for example, does an Incoterm apply?).      
  • Whether either party could lose recognition of its professional qualifications or licensing rights in the other party’s jurisdiction, which will restrict that party’s ability to perform its obligations under the contract.
  • The laws that govern the contract and whether they could change, and where any disputes will be heard. 
  • Whether any personal data will be transferred from the EU to the UK (in which case standard contractual clauses or other appropriate safeguards will be required unless and until the UK obtains an adequacy decision).  Personal data transferred from the UK to the EU will, at the time of writing, be permitted without the need for additional safeguards.

Future-proofing contracts against Brexit is all well and good, but organisations may already be tied into contracts where Brexit was not considered or catered for at the time the contract was entered into.  If Brexit subsequently results in a contract becoming unworkable or detrimental to an organisation, it may have a tough task identifying a legitimate ground for terminating it, as was the case in Canary Wharf (BP4) T1 Ltd (“the Landlord”) v European Medicines Agency (“EMA”).

In 2014 EMA entered into a 25 year lease of premises in Canary Wharf.  The premises were intended to act as EMA’s headquarters.  When the UK notified the EU of its intention to leave the EU on 29 March 2019 the EU demanded that EMA relocate its headquarters to Amsterdam.  EMA subsequently wrote to the Landlord to state that if and when Brexit occurs, EMA would treat the event as a frustration of the lease.  The Landlord commenced proceedings in order to seek a declaration that the lease would not be frustrated as a result of Brexit.

Pursuant to the doctrine of frustration a contract may be discharged if an event occurs after the contract has been entered into which either: (i) renders it physically or commercially impossible to fulfil the contract (for example, if an individual fundamental to the contract dies or becomes incapacitated); or (ii) transforms the obligation to perform into a radically different obligation from that undertaken when the contract was entered into.

The High Court found in favour of the Landlord and held that the lease would not be frustrated as a result of Brexit.  EMA had argued (primarily) that it would not be lawful for it to continue to pay rent to the Landlord following Brexit and that Brexit would therefore frustrate the lease as a result of supervening illegality.  The court dismissed this.  Whilst the court acknowledged that EMA did have to move its headquarters to Amsterdam, it determined that EMA would still have capacity to deal with immovable property in a non-EU country and so it would still be able to perform its obligations under the lease.

Other issues and arguments were raised in the above case and no doubt we will see a large amount of case law in this area in the coming months (and EMA may seek leave to appeal the decision).  The key point to note, however, is that the doctrine of frustration remains - for the time being at least - narrowly defined and the fact that Brexit results in significant detriment or financial hardship for an organisation does not mean that Brexit, in itself, will be a frustrating event.  Alternative grounds (such as force majeure) may be an option in some cases, but any ground upon which an organisation intends to terminate a contract will require careful and detailed consideration before being acted on.   

If your organisation has any queries or requires any assistance with any of the issues raised in this article, please contact any member of our Commercial and IP Team.

Posted on: 15/03/2019

This article is for general guidance only. It provides useful information in a concise form. Action should not be taken without obtaining specific legal advice.

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