Since the UK voted to leave the EU in 2016, businesses have been considering the potential impact of Brexit on commercial contracts, with some considering whether the upheaval caused by Brexit might successfully be used as reason for getting out of a contract.
This issue was considered in the recent case of Canary Wharf v European Medicines Agency , where the High Court handed down its first ever judgement on the question of whether Brexit can constitute a frustrating event. In this case the European Medicines Agency (EMA) - the EU agency responsible for the approval of medicines - argued that its 25-year lease on premises in London, granted in 2014 and worth a reported £500 million, with the Canary Wharf Group was “frustrated” by Brexit.
Under English contract law, a contract is “frustrated” if an event occurs which the parties could not have foreseen when contemplating the contract that radically alters the parties' performance of the contract such that it would be unjust for the parties to continue. Since the effect of frustration is to release the parties from further contractual performance, the bar for a finding of frustration is set high by the courts.
Unfortunately for the EMA, the High Court held that, in this case, the lease had not been frustrated by Brexit. Consequently, the EMA remains liable not only to pay rent but also to perform its other contractual obligations for the remainder of the term. The EMA has been given permission to appeal to the Court of Appeal.
The EMA case affirms that the common law doctrine of frustration is unlikely to save contracting parties from contracts entered into that have since turned out to be a bad deal because of Brexit.
However, there are contractual means by which businesses may seek to deal with any future Brexit uncertainties. Contracting parties often try to “expect the unexpected” and many agreements include express termination rights to deal with unexpected adverse events. For example:
It is debatable whether or not either clause in its standard form would allow a party any respite from its obligations because of Brexit. In any event, for contracts entered into since the referendum vote in June 2016, it will be difficult to argue that the adverse effects of Brexit were unforeseen. Consequently, in response to the turmoil surrounding Brexit – and, in particular, a no deal scenario - parties are increasingly seeking to include bespoke provisions to deal specifically with Brexit.
Similar to a Force Majeure or a MAC clause, a Brexit clause is one that triggers some change in the parties’ rights and obligations because of a defined Brexit event, in order to provide some protection against Brexit-related risks.
Brexit clauses can take various forms and may not be appropriate in all circumstances. For example, a Brexit clause may not be needed where the parties can terminate without penalty on short notice or in short-term contracts.
Some options that could be considered for a Brexit clause include:
In addition to considering whether to include a specific Brexit clause in a contract, consider what amendments might be needed to existing contracts or included in future contracts. For example:
However, during the transition period, the UK and the EU will need to agree the framework for their ongoing future co-operation following the expiry of the transition period. The UK has outlined its proposals for this in a position paper which includes seeking a bespoke agreement that closely reflects the current reciprocal EU rules on jurisdiction agreements as found in the Recast Brussels Regulation.
It remains to be seen whether such an arrangement could be agreed. It may, for example, be scuppered by the UK’s desire to bring an end to the direct jurisdiction of the European Court of Justice. In any case, this scenario only comes into play if a deal is agreed and the withdrawal agreement signed which, at the time of writing, may not happen.
In the event of a no deal scenario (or if a deal is reached but no further agreement is reached following a transition period) the existing EU rules on jurisdiction agreements will cease to apply. You may therefore need to take local advice from lawyers in the relevant member state as to what the approach to English jurisdiction clauses and judgements would be under local laws.
The UK has also taken steps to enter into the Hague Convention on Choice of Court Agreements in its own right on 13 April 2019 or 23 May 2019 (depending on the date of the UK’s exit from the EU). This would require contracting states to recognise exclusive jurisdiction clauses in favour of the English courts and enforce any judgements arising out of them.
If there is a gap between the UK leaving the EU and re-joining the Convention, the UK Parliament has put forward legislation to require courts within the UK to treat exclusive jurisdiction agreements concluded before the re-entry into force of the Hague Convention as if the Hague Convention continued to apply without that gap. However, as the exit day has been extended, these provisions may not be required.
In addition, the Convention only applies where there is an exclusive jurisdiction clause in favour of a contracting state's court and only where the clause was entered into after 1 October 2015. The Convention also does not apply to consumer or employment contracts or to certain other matters such as those relating to land or certain intellectual property rights.
If enforcement in a particular EU member state is important to a party because, for example, key assets are located there, as mentioned above check with local lawyers in that member state whether its courts are likely to enforce an English judgement under their local law.
In summary, it is clear that there is no “one size fits all solution” when it comes to contracts and Brexit. Businesses should review their key contracts and consider how these and future contracts are likely to be affected by Brexit. Businesses will need to consider if any existing contracts need to be amended or renegotiated in light of Brexit.
For further information on the Canary Wharf case see: Canary Wharf v European Medicines Agency lease dispute High Court decides that Brexit is not extraordinary, an article by Andrea Nicholls, senior associate in our property litigation team.