UK court will not hear Brexit 'frustration' appeal until after exit date

The High Court ruled in February that the EMA could not rely on the legal doctrine of 'frustration' to break its multi-million pound lease in Canary Wharf, which runs until June 2039. The EMA has relocated to Amsterdam as a result of the UK's vote to leave the European Union (EU).

The UK is currently due to leave the EU on 31 October 2019. Court listings now confirm that the EMA's appeal hearing will begin long after this date, on 27 or 28 January 2020, and will take around five days. The Court of Appeal will then also need to take time to consider its decision before handing down a judgment, which may take some months.

Clare Francis, Brexit expert at Pinsent Masons, the law firm behind Out-Law, said that the timing would be disappointing for businesses hoping for clarity from the courts before the UK's departure from the EU.

"There is real concern about the impact of Brexit on supply chains," she said. "Those supplying goods or services want to understand in what circumstances they might be excused from doing so, particularly where concerns about continuity in supply chains is an issue. Equally, their clients want to understand their own position if parts of their supply chain fail to perform."

"The Canary Wharf case is unusual in that EMA wished to terminate its lease even before any actual departure by the UK from the EU. However, we are likely to see increasing numbers of these sorts of disputes as exit day approaches and passes, particularly in a 'hard Brexit' scenario. It would therefore have been helpful to businesses in their decision-making to have had the Court of Appeal's decision sooner rather than later. As it is, the High Court decision is likely to represent the current position on frustration as at exit day, but with the potential for that to change on appeal next year," she said.

The legal doctrine of frustration applies in circumstances where the central obligation of a contract can no longer be performed, or where a supervening event so significantly changes the nature of the contract that it would be unjust to hold the parties to what they agreed. The legal test for a frustrating event is a strict one, which requires the supervening event to render the performance of the contract "radically different" when compared to the considerations in play when the contract was agreed.

The EMA, as an agency of the EU, claimed that Brexit would cause its London lease to be frustrated, as it would trigger a number of legal changes relating to its legal capacity to continue with the lease. In February, the High Court dismissed its case. Mr Justice Smith found that while the EMA's privileges and immunities granted by virtue of EU law would be "materially and adversely affected" in a no deal Brexit scenario, the EMA would not be prevented from paying rent to a landlord in a non-EU country. In addition, he found that there was nothing in EU law which prevented the EU from maintaining the headquarters of one of its agencies in what would be a 'third country' after Brexit.

The judge did conclude that the UK's departure from the EU was not something that was "relevantly foreseeable" when the parties agreed the lease in 2011. However, he found that the EMA had "assumed the risk of change" over the 25-year term of the lease. The EMA had "quite consciously entered into the lease without a break clause"; and had negotiated alienation provisions defining the circumstances in which it could depart the premises.

Mr Justice Smith gave the EMA permission to appeal following his decision, recognising the "significant ramifications" of the case and finding that the appeal had a real prospect of success. The EMA lodged its appeal with the Court of Appeal in April.

Clare Francis of Pinsent Masons said that, regardless of the outcome of the appeal, it was likely that there would continue to be "a high threshold for showing that contracts have been frustrated as a result of Brexit".

"Businesses should therefore continue, as part of their contingency planning, to consider how best to put themselves in a position to perform their existing obligations, or else whether there is scope for renegotiating those obligations to spell out what should happen in the event of different Brexit outcomes," she said.

"Parties entering into new contracts now are unlikely to be able to claim that any future Brexit acts as a frustrating event, since Brexit-related risks are so clearly now at the forefront of commercial parties' minds. For such parties, it is particularly important to provide expressly in their contracts for any outcomes they wish to flow in the event of Brexit," she said.