Brexit: frustration and force majeure

The alarm bells started to ring with the third client email asking for confirmation that the High Court ruling in EMA v Canary Wharf [2019] EWHC 335 (Ch) definitely means that Brexit cannot be regarded as a "force majeure" event. The ruling does not have that effect. Frustration and force majeure are different concepts, and it remains possible that an express force majeure clause might suspend or release contractual obligations that are made impossible – or even just more difficult or expensive – to perform as a result of Brexit.

The EMA ruling was concerned with the doctrine of frustration. That overarching contractual doctrine applies whether or not the agreement includes a clause specifying particular events that will trigger the suspension or release of obligations. Frustration occurs where something unforeseen happens after the contract was entered into, making the contract either impossible to fulfil, or transforming the obligations into something radically different from those at the start. For a contract to have been frustrated, the event must be fundamental to the terms of the contract, and do more than simply make performance of obligations less convenient or more expensive. The doctrine is difficult to apply, and arguments based on frustration rarely succeed.

In EMA the claimant had no choice but to argue on the basis of frustration. The agreement in question was a lease of commercial premises at Canary Wharf, granted for a term of 25 years. In England and Wales, commercial leases granted on "institutionally acceptable" terms rarely include express force majeure provisions. Consequently, the general doctrine of frustration offered the only potential escape route from significant ongoing liabilities.

Force majeure clauses

Contractual force majeure clauses developed to overcome the difficulty and inconvenience of frustration. In the rare circumstances where frustration could be shown, its effect was to bring an immediate end to the contract, leaving loss where it fell. Parliament intervened, passing the Law Reform (Frustrated Contracts) Act 1943 to allow the adjustment of rights and liabilities between the parties to a frustrated contract. However, that Act did not alter the essential effect of frustration, which is to terminate the contract.

In many cases, the parties to a commercial contract would prefer obligations to be suspended rather than released, allowing time to determine whether the effects of an emergency event come to an end or reduce sufficiently to allow the contract to revive. Suspension, rather than termination, can save significant time and cost in renegotiation or finding an alternative supplier. If the problem continues beyond an agreed threshold (often set at three or six months), then the parties have the option to terminate the contract and to adjust losses on an agreed basis.

As well as allowing greater flexibility in terms of suspension rather than automatic termination, express contractual clauses allow the parties to specify events that will be regarded as force majeure. The question is one of specific contractual interpretation, rather than overarching doctrine. In essence, if the parties have agreed that a particular event will count as force majeure, then it will trigger suspension or release of obligations even if it would come nowhere close to meeting the test for frustration. For example, there is no requirement that the event must be unforeseeable at the time the contract is made. Consequently, a contractual provision specifying war or armed conflict as a force majeure event might be valid even if the outbreak of conflict was fully expected when the contract was made.

There are limitations. Force majeure clauses came under close scrutiny following the closure of the Suez Canal during the crisis of 1956. In one case [1] , the court refused to accept that closure of the canal released a party from its obligation to transport Sudanese groundnuts to their European buyer. It was not possible to take the short route through the Suez canal, but the contract did not specify the route, so the judge held that the shipment could be taken around the Cape and up the west coast of Africa. It did not matter that the longer route would be far more costly. Force majeure clauses involve the suspension or release of obligations, so they will be interpreted strictly. Consequently, since the Suez Canal cases of the 1950s and 1960s, well-drafted force majeure clauses usually provide for suspension or release where the specified event prevents performance, or makes performance materially more difficult or expensive.

Can Brexit be a force majeure event?

The short answer is "yes" – depending on the date of the contract and the precise terms of the clause.

Many force majeure clauses specify government actions or changes of law as relevant events. Others simply require events to be beyond the parties' control, rather than being unforeseeable. Since the referendum result became known on 24 June 2016 there have also been specific clauses identifying Brexit as a force majeure event in its own right – often described as the point at which the United Kingdom ceases to be a full member of the European Union.

The EMA ruling has no effect on contractual force majeure clauses. Any such clause will have to be interpreted and applied on its own terms. Consequently, it remains an essential element of Brexit preparation and risk management to check the force majeure clauses in contracts, particularly where delivery times for perishable goods or "just in time" processes are concerned.