Brexit delays prompt commercial contract considerations

By Lindsay Ellis from Warwickshire-based Wright Hassall.

Although there is still uncertainty surrounding the timing of Brexit, the recent vote to delay the process has given businesses enough time to review their existing contracts and the obligations within them.

In order to avoid issues after a decision is made, it is important organisations consider how it might affect existing contracts and not only those proposed to come into force post-Brexit.

Existing contracts. When it comes to reviewing existing contracts, there are a range of important issues that must be considered, starting with business change. Organisations must first discover which contracts will be affected if certain in-house operations are relocated post-Brexit.

For many businesses, Brexit could negatively impact their supply chain and they should consider the performance of obligations by, and the cost of performance by, subcontractors and suppliers. This is particularly important for those who will be responsible for any increased costs (such as tariffs) or delays due to border issues.

Other key areas to consider include: term (and the ability to exit early), territory, currency, tariffs, customs clearance (the consequence of any delays), resources, licensing/consents, and tax. Failure to review and plan for these could result in increased costs and/or damage to business performance.

Force majeure. A contract typically contains force majeure clauses.

Depending on the drafting, these can relieve a party from liability for a breach resulting from ‘circumstances beyond its reasonable control’. However, if Brexit was likely when the contract was agreed, it could be argued the parties should have planned for its effects.

Without a specific reference to Brexit, force majeure clauses are unlikely to help of itself, but depending how the clause was drafted, it might address delays in delivery of goods due to cross-border issues.

Material adverse change (MAC). MAC clauses, although not common, appear in certain types of contracts, like lending, where they allow the lender to end the arrangement if the borrower’s position or circumstances change adversely.

They are also used to allow a buyer to walk away from a corporate acquisition deal if events occur that are detrimental to the target company.

Whether the effects of Brexit trigger a MAC clause will depend on how it was drafted, but typically a party can’t rely on a MAC clause based on circumstances known when agreeing a contract.

Compliance with law clauses. Many contracts state that parties must comply with applicable law. In any event, it will be a matter of interpretation whether such a clause could oblige a party to absorb the costs associated with Brexit-related changes in law.

Long-term contracts typically address what will happen if the law changes, often specifying that charges can only be increased in limited circumstances, with the supplier required to consult with the customer before making any necessary changes to the services.

Change Control. Many contracts will contain a clause outlining a procedure if either party wishes to change it, which typically involves discussions, with only necessary legal or technical changes being able to be compelled. Generally, there is no right to terminate if a change is not agreed.

Such a clause may help if, for example, the contract must be performed differently to reflect a Brexit-related change in law.

Termination. The contract may include scope for termination, by either party. This may be in connection with circumstances arising from Brexit related events or a failure to agree a change.

If a contract’s termination clause gives a party a right to terminate on relatively short notice, the prospect of termination can always be raised as a means of encouraging negotiation.

Common law and frustration. Frustration arises where an event, like a change in the law, occurs after the date of the contract, radically transforming the obligations of either party or making it physically or commercially impossible to fulfil the contract.

However, a contract is not frustrated due to inconvenience, hardship, financial loss or when the event should have been foreseen by the parties. As such, it is generally accepted that frustration will not help with Brexit, although it might apply if certain changes in law were to be made subsequently, which would make it impossible to fulfil a contract.

Interpretation and implied terms. The courts are unlikely to interpret a contract or imply a term to assist a party adversely affected by Brexit and will not relieve a party from the consequences of their poor business practices, if that involves departing from the natural meaning of the contract.

Similarly, the fairness of a proposed implied term or the fact that the parties would agree to it is insufficient grounds for implying it.

Both interpretation and implication of terms have regard to the background knowledge reasonably available to the parties at the time they entered the contract. If they fail to include Brexit provisions, it might be considered they have accepted any additional costs and risks should lie where they fall.

Checklist for drafting future contracts. When it comes to drafting future contracts, there are a range of key areas that need to be considered. As above, these include: term (and the ability to exit early), territory, currency, tariffs, customs clearance (the consequence of any delays), resources, licensing/consents, and tax.

It is crucial that territorial references to the EU clarify whether this includes the UK and where the parties agree that certain events prompt specified consequences (eg, a renegotiation on increases to tariffs), the contract deals with this appropriately.

What are the options? By not drafting contracts that address Brexit uncertainty, there is a risk that a party will be obliged to continue to fulfil its contractual obligations, even if Brexit-related events render it commercially unattractive.

However, doing nothing may be an option for a party who can terminate contracts at short notice or are confident in their ability to perform regardless of Brexit’s outcome.

Brexit clause. Inserting a ‘Brexit clause’ into contracts will trigger some change in the parties’ rights and obligations when a defined event occurs – this ‘if/then’ clause attempts to govern the outcome of a change.

Brexit could affect almost every aspect of doing business and the best a Brexit clause may offer is a binding requirement for the parties to try and renegotiate the contract.

For other contracts, it may be possible to specify the consequences of certain events, but with Brexit, there is the risk that events occur that have not been first considered.

Making the necessary changes. It is clear from recent events that the only current certainty with Brexit, is more uncertainty.

Whatever comes next, Brexit will bring change and now is the perfect time to formulate solutions that ensure the future prosperity of your business.

There are a range of potential avenues that should be explored to ensure the security of your organisation, all of which can effectively mitigate the potential risks associated with Brexit and commercial contracts.

Remember, existing obligations within contracts could be negatively impacted and without taking the necessary steps, you are potentially inviting risk. So, seek advice from experienced contract lawyers and begin planning for life after Brexit, sooner rather than later.