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Frustration – the case of Canary Wharf and the European Medicines Agency

Frustration is the legal doctrine by which a contract may be brought to an end by an unforeseen event for which the contract does not provide.  

Many contracts will include a force majeure clause, by which the parties themselves decide what will happen if the contract cannot be fulfilled because of an event that is neither party’s fault. If there is no force majeure provision, however, a party may seek to rely on the doctrine  of frustration.  

Because force majeure clauses are the norm, it is relatively rare for frustration to be considered by the courts. The prevalence of Covid-19, however, may mean that the doctrine  is invoked more frequently: businesses unable to fulfil their contractual obligations because of the coronavirus may seek to argue that their contracts have been frustrated. 

This note examines Canary Wharf (BP4T1 Ltd and others European Medicines Agency [2019] EWHC 335 (Ch), a recent case in which the doctrine of frustration was reviewed in some depth.  

For a note on Covid-19, force majeure and frustration more generally, see our separate article.1 

Background 

The European Medicines Agency (EMA) was the tenant of a property in Canary Wharf, a new building constructed to its specification, under a 25-year lease. The landlord was Canary Wharf (BP4) T1 Ltd (CW). The parties entered into an agreement for lease in August 2011 and completed the lease itself in October 2014. In 2017, after the Brexit referendum, the EMA wrote to CW stating that, when the United Kingdom left the European Union, it would treat that event as a frustration of the lease. CW responded by commencing proceedings in the High Court, seeking a declaration that Brexit, when it took place, would not cause the lease to be frustrated. Marcus Smith J delivered his judgment in February 2019. 

The case for frustration 

The EMA’s case was, essentially, that the United Kingdom’s withdrawal from the European Union would trigger various legal changes relating to its legal capacity to continue with the lease that would cause the lease to be frustrated.  

First, the EMA argued that, once the UK had left the EU, it would no longer enjoy certain privileges and immunities under the EU treaties, which were necessary to its proper functioning and independence.  

Secondly, after Brexit, the EMA would not be able to be lawfully located in the premises and so, as a matter of law, it could not use them.  

Thirdly, the EMA would not, as a matter of law, be able to exercise the rights conferred on it by the lease, and so it could not assign or transfer the lease.  

Fourthly, it would have no power to meet its obligations under the lease, including the obligation to pay rent.  

Finally, the EMA argued that, if it had to continue paying rent under the lease while also paying to rent premises elsewhere, such a double payment of rent would seriously impair its effectiveness in performing its functions.  

The case against frustration 

CW disputed many of the points on which the EMA’s five grounds were founded. More fundamentally, however, it argued that, even if established, none of those grounds could amount to a frustrating event, because the EMA’s relocation away from London as a result of Brexit could not amount to an event capable of frustrating the lease. 

The doctrine of frustration 

Marcus Smith J summarised the doctrine as follows: ‘The doctrine of frustration operates to bring a contract prospectively to an end because of a supervening event’. The central propositions of the doctrine are articulated in three cases.  

In Davis Contractors Ltd Fareham UDC [1956] AC 696, Lord Radcliffe framed the following test: ‘[F]rustration 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.’ 

In National Carriers Ltd Panalpina (Northern) Ltd [1981] AC 675, Lord Simon said: ‘Frustration of a contract takes place when there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances; in such case the law declares both parties to be discharged from further performance.’ 

Finally, in J Lauritzen AS Wijsmuller BV, The Super Servant Two [1990] 1 Lloyd’s Rep 1, Bingham LJ ‘identified five propositions, established by the highest authority, which he considered were not open to question’, as follows:  

‘(1) The doctrine of frustration was evolved to mitigate the rigour of the common law’s insistence on literal performance of absolute promises. The object of the doctrine was to give effect to the demands of justice, to achieve a just and equitable result, to do what is reasonable and fair, as an expedient to escape from injustice where such would result from enforcement of a contract in its literal terms after a significant change in circumstances. 

‘(2) Since the effect of frustration is to kill the contract and discharge the parties from further liability under it, the doctrine must not be lightly invoked and must be kept within very narrow limits. 

‘(3) Frustration brings the contract to an end forthwith, without more and automatically. It does not require an act by the parties to the contract. 

‘(4) The essence of frustration is that it should not be due to the act or election of the party seeking to rely on it. 

‘(5) A frustrating event must take place without blame or fault on the side of the party seeking to rely on it.’ 

After reviewing various juridical bases for the doctrine of frustration, Marcus Smith J concluded that the essence of the doctrine is that performance of the contract should be rendered radically different by a fundamental change in circumstances. ‘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 consideration in play at the conclusion of the contract, will the contract be frustrated.’ 

There is no fixed number of types of frustrating event. The two types relied on by the EMA were frustration of the parties’ common purpose and supervening illegality. (Other types include destruction of the subject matter of the contract, various types of impossibility, and impracticality.) 

Findings as to supervening illegality 

After reviewing the EMA’s constitution, and relevant EU law, the judge found that, while the EMA’s privileges and immunities under the EU treaties would be materially and adversely affected by Brexit, its capacity to deal with real property in a third country, and hence to use or dispose of the premises and to pay rent under the lease, would remain. Consequently, the EMA’s case that the lease would be frustrated by supervening illegality would fail.  

Moreover, even if (in the alternative view) the EMA did not have capacity, under EU law, to deal with the lease, that would not amount to a supervening illegality. While English law has regard to the foreign law of incorporation or domicile of a party in relation to that party’s capacity to enter into a contract, it does not have regard to such foreign law when considering the capacity of a party to continue to perform contractual liabilities already assumed. 

If, contrary to the findings made above, the EMA lacked capacity to deal with the lease, and such a lack of capacity did amount to a supervening illegality, then the lease could in principle be frustrated, if the EMA were obliged to pay the rent but was deprived of all modes of enjoyment of the premises, and still more so if the payment of rent was itself unlawful. But any such frustration would be self-induced, and so would not relieve the EMA from liability, because the EU itself had required the EMA to move from the UK without making arrangements for ameliorating the legal effects of that requirement. 

Frustration of common purpose 

In considering whether the lease could be terminated by way of frustration of common purpose, Marcus Smith J followed the approach described by Rix LJ in Edwinton Commercial Corp Tsavliris Russ (Worldwide Salvage and TowageLtd, The Sea Angel [2007] 2 All ER (Comm) 634 

‘[T]he application of the doctrine of frustration requires a multi-factorial approach. Among the factors which have to be considered are the terms of the contract itself, its matrix or context, the parties’ knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of the contract, at any rate so far as these can be ascribed mutually and objectively, and then the nature of the supervening event, and the parties’ reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances.’ 

After reviewing expert evidence, Marcus Smith J found that that the withdrawal of the UK from the EU was not relevantly foreseeable when the agreement for lease was entered into in August 2011.  

Nevertheless, it was not contemplated by the parties that the purpose of the lease would have failed if the EMA was unable to occupy the premises for the full 25-year term. While there was no break clause, and the premises were to some extent bespoke, the lease included provisions by which it might be assigned or the premises sublet. Ultimately, there was no common purpose other than the provisions of the lease itself, which was the outcome of rival negotiations driven by different objectives. 

Finally, the supervening event, namely the EMA’s departure from the premises, was not merely envisaged but expressly provided for in the lease. Consequently, the lease was not frustrated by reason of a failure of common purpose. 

Comment 

This case illustrates that it may not be easy for a party which cannot perform its obligations under a contract to argue that the contract has been frustrated.  

In particular, it is not sufficient if the unforeseen event makes the contract more expensive or less convenient to perform: the event must be fundamental to the terms of the contract. 

If, though no fault of its own, a party finds performance of a contract to be impossible, it should first determine whether the contract contains a force majeure clause that would provide relief. If there is no force majeure clause, or if the clause does not cover the circumstances in question, it may be possible to argue that the contract has been frustrated.   

To succeed, it will be necessary to show that an unforeseen event has occurred, after the contract was entered into, which either makes the contract impossible to fulfil or transforms the obligations under the contract into something radically different. 

Postscript 

The EMA was granted permission to appeal the decision of the High Court, but the appeal was withdrawn after the EMA succeeded in subletting the premises to WeWork in July 2019. 

 For more information on this article please contact Andrew Perkins or visit the Coronaviris/ COVID-19 area on our website.

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