The Frustrations of Brexit – Managing Risks in Construction Contracts

A recent judgment in the High Court has held that an EU agency’s lease of a London property would not be frustrated as a consequence of the UK’s withdrawal from the EU. Whilst the case concerns a lease and is specific to its facts, it provides a useful reminder of the difficulties in making out a case on frustration, and highlights the risk of similar arguments being raised in the construction industry.

Canary Wharf (BP4) T1 Limited v European Medicines Agency

The European Medicines Agency (“EMA”) is an EU agency that had taken a lease of a building in Canary Wharf in London as its headquarters in 2014. In 2017, EMA wrote to its landlord (“CW”) saying that if the UK withdrew from the EU it would treat that event as a frustration of the lease. CW referred the matter to the High Court seeking a declaration for the sake of certainty that Brexit would not frustrate the lease and that EMA would remain bound into its terms.

The main positions claimed by EMA were “frustration of a common purpose”, and “supervening illegality”, on the facts that the EU would relocate the EMA to Amsterdam in the event of the UK’s withdrawal, and that (under EU law) the EMA would not have legal capacity to hold or deal with real estate in the UK. The court rejected both arguments on the grounds that:

1. the EMA would still have capacity to deal with real estate,
2. even if it did not, supervening illegality in another jurisdiction could not serve to frustrate the lease,
3. the illegality was “self-imposed” by the EU, and
4. there was no common purpose, but rather a commercial negotiation between parties with their own commercial interests at heart.

For a more detailed overview of the High Court’s decision, please see our earlier Law-Now here. The remainder of this Law-Now considers the implications of this decision for the construction industry.

Implications for the construction industry

This case centred on a lease and quite unique circumstances. However, its implications would have been extremely serious had the judgment gone the other way, potentially opening the floodgates for frustration arguments in the wider commercial contracts market, including construction.

The judge in this case went to some lengths to highlight the difficulties in making out a claim for frustration and it is hard to conceive of many circumstances where Brexit might offer genuine grounds to claim frustration of a building contract.

There is little doubt though that the uncertainty of the political and economic climate is worrying the market and that parties to construction contracts are considering ways to manage the risks this brings.

The tried and tested way for parties to deal with uncertainty is to try to legislate for it in the terms of the contract – to make efforts to foresee the risks and allocate them accordingly.

We have previously published a Law-Now here on how different contracts will respond to changes in the law in terms of entitlements to time and money, but as the time to leave approaches, albeit the timetable for this remains uncertain, this question of allocation of risk is increasingly arising.

The types of risks we have identified include:

• Imposition of new or increased tariffs, taxes or import duties and potential delay caused by import restrictions – red tape, customs delays, embargos. There is also the possibility of additional costs of trading as a result of the UK no longer being part of the wider EU market and a loss of negotiating/bargaining power. BEIS data shows that the UK imported £10.3bn of building materials from the EU in 2017 - 60% of all building-material imports and a further £6.7bn comes from the rest of the world. In that context, where the UK relies heavily on these imports, and friction related to trade could cost both financially and in time.
• Change in laws or regulatory requirements – the intention of the EU Withdrawal Bill is that the status quo will initially be maintained but whether that Bill is ever accepted by the UK Parliament remains to be seen. In any event, that is likely to change in future meaning it is a consideration for long-term contracts or those with lengthy lead-in periods. There is certainly the possibility of EU laws developing so that there is no longer equivalence between UK and EU going forward.
• Licences and consents – there is the possibility of the UK no longer benefiting from EU-wide approval schemes or reciprocal arrangements between the EU and the rest of world.
• Availability of key personnel and labour if there are restrictions in movement of people or simply if the UK becomes a less attractive place to live and work. There were 217,000 EU nationals working in the UK construction industry in 2017, accounting for 9.3% of the total construction workforce.

• Increased costs (labour, materials, equipment, exchange rate fluctuations, interest rate fluctuations, cost of borrowing)
• Impact of the above factors on the supply chain and implications if it started to fail.
• Impact on economic viability of projects if delays or increased costs mean that the business case for them is no longer met.

A number of different contractual solutions are being developed to deal with these although no settled market position has yet emerged.

Conclusion

Given the above, whilst it is unlikely we will see a rush to the courts with frustration arguments as a result of Brexit, it once again puts the spotlight on the management of uncertain and unquantifiable risks in the construction industry and how these are allocated. It does serve as a useful prompt that it is necessary to keep thinking about the possible legal and market consequences of this and other risks inherent in an era of political and economic uncertainty and how to brace for these.

References: Canary Wharf (BP4) T1 Ltd v European Medicines Agency [2019] EWHC 335 (Ch).