On 20 February 2019, the English High Court delivered its eagerly awaited judgment in Canary Wharf v EMA  EWHC 334 (Ch), rejecting the EMA’s argument that the United Kingdom’s withdrawal from the European Union would amount to a frustrating event allowing it to terminate its lease of premises in London.
What is frustration
Under English law, frustration allows a contract to be set aside on the basis of an unforeseen event which renders the contractual rights and/or obligations radically different to those contemplated by the parties at the time the contract was entered into. A successful claim for frustration allows the claimant to terminate the contract immediately and discharges its future liabilities.
The dispute between Canary Wharf and EMA centred around EMA’s £500 million, 25-year lease of commercial premises in Canary Wharf. The lease restricted assignment of the property to a new tenant, and also included onerous subletting provisions.
The EMA argued that its lease would be frustrated by Brexit because remaining in the Canary Wharf premises following the UK’s withdrawal from the European Union would be illegal under Regulation (EU) 2018/1718 (the 2018 Regulation), which required it relocate its headquarters to Amsterdam. Once it had relocated, the EMA would be left paying rent for a property which the 2018 Regulation prohibited it from using, and which it could not assign or sublet under the terms of the lease.
In a lengthy and detailed judgment, Marcus Smith J ruled that the lease would not be frustrated by Brexit. Whilst the consequences of Brexit would be materially adverse to the EMA, it was not impossible for the EMA to continue to occupy the premises. He held that a frustrating event must “strike the parties to the contract ‘out of the blue'”, and if one party could have done something to ameliorate matters this is a relevant issue to take into account. The judge argued that the European Union could have done more than ‘baldly’ order the relocation of the EMA to new headquarters in Amsterdam, and had the power to make further arrangements for the EMA’s departure from London. Smith J found that the EMA’s shift of headquarters was a direct consequence of the 2018 Regulation, which was implemented by the European Union and was not a legal necessity. He therefore held that this was a case of self-induced frustration on the part of the EMA.
The Canary Wharf v EMA judgment provides a useful insight into the English Court’s approach to arguments that Brexit has frustrated commercial agreements—the bar for application of the doctrine of frustration remains a high one. It is generally expected that the EMA will appeal this judgment, and it remains to be seen in due course whether the Court of Appeal will agree with the reasoning of the judge. In any event, this is the first significant judgment dealing with the effect of Brexit on pre-existing long-term contractual arrangements. It will certainly not be the last.