In many contracts, one or other party may rely on the benefits of membership of the European Union (EU) in order to make the contract profitable or even viable. For instance a contract may oblige parties to comply with EU Laws, or have a territorial aspect which refers to “the EU”, or it may benefit from EU subsidies or tariffs.
Brexit, when it happens, may therefore make such contracts more onerous, less profitable and in some cases, impossible to perform. Although the Courts will not find that a contract has been frustrated simply because it has become uneconomical, those contracting parties that might be adversely affected by the Brexit decision are likely to be asking their lawyers whether Brexit or associated events could amount to a “frustrating event” that could bring the contract to an end absolutely under the doctrine of frustration.
A frustrating event is a supervening outside event which is not due to the fault of either party and is so fundamental that it renders the contract impossible to perform, or makes performance so different from that which was originally contemplated that it would be unjust to hold the parties to their contractual liabilities.
The recent Court of Appeal decision in Armchair Answercall Limited v People in Mind Limited  EWCA Civ 1039 also considered the issue of foreseeability, and found that a frustrating event could not be one that the contracting parties could “reasonably be thought to have foreseen as a real possibility”. In this case, it was argued that the rejection by franchisees of a new method of business (where the franshisees then went on to set up their own rival company) was a “frustrating event” unforeseen by the contracting parties at the time the contract was entered into. The Court of Appeal disagreed. They found that the very fact the contracting parties had been negotiating with the franchisees to adopt the new model meant that it was always a possibility they might reject it. Accordingly, the rejection could not be considered a frustrating event and the parties were held to their contractual obligations.
Applying this issue of foreseeability to the Brexit scenario, whilst each case will depend on the facts and circumstances particular to it, it might be argued that the very existence of Article 50 could mean that the UK leaving the EU has always been technically foreseeable, but it might not have been actually foreseen or was not reasonably foreseeable by the parties. One can certainly anticipate arguments that the political movement to leave the EU was a marginal one until recent times and indeed the result of the 23 June 2016 referendum was unexpected in many quarters, even those supporting the movement to leave. Therefore, parties entering into contracts in previous years might not have been expected, on any reasonable basis, to foresee the result of the referendum. Therefore, assuming all other conditions for frustration are met, we expect to see such arguments coming into play once Brexit comes into effect.
The recent Court of Appeal decision has, however, come as a timely reminder that the doctrine of frustration will be applied strictly. If arguments of frustration do not work, there may be other options. For example, many contracts include force majeure clauses that are drafted sufficiently widely that a “Brexit” scenario may arguably entitle relief.