Frustration of Purpose as a Tool to Avoid Contracts in New York: The BREXIT Fallout

We have clients that are supplying products to UK companies and UK companies that are being supplied products by U.S. companies. With the surprising outcome of the Brexit vote, the purpose of these agreements are now frustrated because, often, these products are used in finished products assembled in EU nations. This situation often arises in complex products. For example, a U.S. business has a piece of technology that is integrated into a British component. The British component is then further integrated into a finished product manufactured in Germany. The situation is not as rare as you think.

Brexit Contracts, Frustration of Purpose, Avoidance of Contracts BrexitWe suggest an immediate review of your contracts. With the potential for UK companies to have decreases in sales, a fixed supply contact may be invalidated based on the Frustration of Purpose principle. Obviously, the opposite may also be true. A UK company may be unable to provide products (Impossibility Principle) or provide products at the same cost because of Brexit.

While reviewing your agreements, it is important to understand the general principle of frustration of purpose, which is defined in The Restatement of Contracts, Second § 265:

 Where, after a contract is made, a party’s principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or circumstances [of the contract] indicate the contrary.

New York courts and many other courts have accepted this basic definition in numerous cases. The key is for the party attempting to “avoid/discharge” the contract to establish that:

  1. The contract is substantially frustrated;
  2. No fault for the frustration is attributable to the party utilizing the principle to its benefit;
  3. The occurrence of the event (in this case – Brexit), the non-occurrence of which was a basic assumption for the contract being made; and
  4. The contract does not have language to negate this argument.

Hopefully, your attorney drafting your deal has anticipated a frustration argument. Even if the frustration issue has been considered, it is important to, promptly, analyze the potential effects of Brexit on your contracts.

For more information on the potential effects of the United Kingdom leaving the European Union, please contact one of our attorneys. Our attorneys work with MBAs, accountants and former executives from leading multinationals – our law firm is forming a team to study this issue.  Please check back soon for more information.

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