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More on the Frustration of Purpose Doctrine: Brexit Not Sufficient Grounds

The legal doctrine of Frustration of Purpose has been in the news lately. We wrote about the doctrine recently. Under California law, frustration of purpose will excuse performance of a contract if there is some unforeseen event or some extreme hardship that the courts should be applying on the ground of “fairness.” But, it is a very high hurdle to clear and the Brexit case is a good example. See news report here from the Manchester Guardian.

The contract at issue in the Brexit example is/was a 25-year commercial lease for office space in London. The tenant is/was the European Medicines Agency, an agency of the European Union (“EU”). As many know, the United Kingdom is set to leave the EU soon — “Brexit” — and, consequently, the Medicines Agency will soon be relocating to Amsterdam. In mid-2017, the Medicines Agency sent a letter off to the landlord of the office space, the Canary Wharf Group, claiming that Brexit was “an event of frustration” and that it needed out of its lease. The Canary Wharf Group promptly sued the Medicines Agency and sought a declaration from the English court that Brexit was not an event of frustration. The rent is reportedly £13 million a year.

Before the court, the Medicines Agency claimed that Brexit was just the sort of unforeseen event that has created an extreme hardship that makes the whole purpose of the contract pointless. Since the UK will not be part of the EU, there is no point to having an EU agency in London. Under both English and California law, to show frustration of purpose a party must prove:

Severity and harshness of the new conditions/events substantially destroyed the purpose of the contract
Event was unforeseen, not the fault of any party and was not within the risks that were assumed under the contract and
Both parties experienced the frustration

English and California law are similar; indeed, the former is the root of most jurisprudence in the US.

It is evident from listing the elements of the frustration of purpose doctrine that the Medicines Agency could not prevail. The English court noted several reasons. First, it was not clear that the Medicines Agency needed to move. Given today’s travel methods and speeds, Amsterdam and London are not that far apart. While there might be convenience obtained by relocating to Amsterdam, Brexit was not forcing the Medicines Agency to relocate; London was going to continue existing and travel was going to still be allowed. Inconvenience was not equivalent to frustration. Second, the Medicines Agency would not be ceasing to exist and it would still need office space. Thus, the purpose of the lease — the need for office space — was, in fact, not destroyed. Third, the Medicines Agency had other commercial options that would permit it to honor its obligations such as subleasing which it was allowed to do under the lease. Fourth, nothing has happened or was foreseen to happen to the office space itself. Often, frustration of purpose is found where the object of the contract becomes wholly compromised (like land becoming permanently submerged below water). Finally, the court noted that the frustration, if it existed, was only from one side. The landlord has not suffered a frustration of purpose. The law requires frustration of purpose on both sides.

As noted, the same rule applies here in California. Frustration of purpose requires something truly extraordinary and the court in London said that Brexit was not truly extraordinary for purposes of the frustration doctrine.

Contact San Diego Corporate Law

For more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard focuses his practice on business law, transactional, and corporate matters, and he proudly provides legal services to business owners in San Diego and the surrounding communities. Mr. Leonard has been named a “Rising Star” four years running by SuperLawyers.com and “Best of the Bar” by the San Diego Business Journal. Mr. Leonard can be reached at (858) 483-9200 or via email. Like us on Facebook.