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Frustration by common purpose. The EMA argued that, from the outset, both parties intended for the premises to be used for the duration of the lease as the EMA’s headquarters and that the UK’s withdrawal from the EU would frustrate that common purpose. This too was rejected by the court, which held that the parties in fact had entirely different purposes. Canary Wharf’s purpose was long-term cash flow at the highest rate and to ensure that it was protected in the event of the EMA’s departure from the premises. This was supported by the lease not containing a break clause but there being provisions for it to be sublet or assigned. The EMA’s purpose was the lowest possible rent and flexibility on the term.

Implications for commercial contracts

There is a reason why the doctrine of frustration is rarely relied on and, setting Brexit to one side for a moment, the court’s decision in Canary Wharf serves as a timely reminder of just how difficult it is to establish that a commercial contract has been frustrated. Parties are expected to contemplate at the outset that circumstances may change, even significantly, throughout the duration of a lease and, by extension, any commercial contract. Those changes, based on a long line of precedent, are unlikely to result in a contract being frustrated.

Canary Wharf also has wider implications. In particular, it provides useful insight as to the court’s handling of the issue of the foreseeability of Brexit. The court concluded that, as at the relevant date, being August 2011 when the agreement for lease between the parties was entered into, the withdrawal of the UK from the EU was foreseeable as a theoretical possibility. However, in this instance, the court held that no inference could be drawn from the parties’ failure to cater for this specific possibility in the lease. This was because, in August 2011, the political debate did not turn on the withdrawal of the UK from the EU, but rather on the terms of the UK’s continuing membership.

Importantly, the court did not specify the earliest point at which Brexit would have been foreseeable but it did confirm, rather unsurprisingly, that it would certainly have been foreseeable at the point of the referendum in June 2016. Arguably, it will be difficult for future parties to argue that it was not foreseeable in early 2016 when the government announced that the referendum would take place. . It remains to be seen whether, on a different set of facts, Brexit could be deemed, in the court’s own words, “relevantly foreseeable” during this intervening period from mid-2011 to 2016. It is also interesting to consider whether the EMA, as an EU agency, might be held to a higher standard as to the foreseeability of Brexit than, for example, a smaller commercial entity based in the UK or another EU member state.

Canary Wharf is also notable because the court categorically rejected the notion that commercial contracts will be fundamentally impossible to perform as a result of Brexit. The court accepted that the EMA is suffering an unexpected financial hardship and that its removal out of London is not a matter that it desired but was caused by an event outside its control. However, the court also noted that the EMA chose to enter into a long-term relationship, with long-term obligations, and it played a role in framing those obligations. In all likelihood, Canary Wharf should prevent the floodgates from opening with regard to claims being brought by parties claiming Brexit as a frustrating event in an effort to avoid higher costs, tariffs and increased red tape after the UK’s withdrawal.

Providing for contingencies

Canary Wharf also indicates that events created by political decisions, or indeed uncertainty, are unlikely to be held to frustrate a contract. Therefore, parties entering into a commercial contract should consider expressly providing for contingencies, so far as possible, that anticipate a changing political landscape, especially where a political decision appears to be more than a theoretical possibility.

In practice, this is certainly easier said than done but uncertainties can be addressed in the form of a force majeure or material adverse change clause (see feature article “Force majeure in a changing world: predicting the unpredictable”, this issue). These clauses should be as prescriptive as possible and, depending on the commercial bargaining power of each contracting party, either expressly include or exclude specific events.

However, the need for contingencies to be built into a contract does present a challenge to the UK market if it means that doing business in the UK is ultimately more difficult or cumbersome at the contractual stage. In relation to those with contracts entered into before the UK’s decision to leave the EU, these contracts should be revisited and stress-tested given the recent decision in Canary Wharf and the difficulties of establishing common law frustration.