COMMENT
THE BREXIT EFFECT
14 MAY 2019
Take advantage of the current Brexit breathing space by
reviewing your commercial contracts, advises Lindsay
Ellis, partner at Wright Hassall
Although there is still uncertainty
surrounding the timing of Brexit, the recent
vote to delay the process has given businesses
time to review their existing contracts and
the obligations contained within them.
Organisations should consider how Brexit might
a ect existing as well as future contracts.
Some businesses could see their supply chains
negatively impacted by Brexit, and it’s important
they review the obligations of subcontractors and
suppliers. This is especially true for those who will
be responsible for increased costs or delays due to
border issues.
Other key areas to consider include term (and
the ability to exit early), territory, currency, tari s,
customs clearance (the consequence of any
delays), resources, licensing and consents, and
tax. Failure to review and plan for problems could
result in increased costs and impaired business
performance.
FORCE MAJEURE
A contract typically contains force
majeure clauses. Depending
on the dra ing, these
can relieve a party of
liability for a breach
resulting from
‘circumstances
beyond its
reasonable
control’.
However, if
Brexit was a
reasonable
possibility when
the contract was
agreed, it could be
argued the parties
should have planned for
its e ects.
Without a specific reference to
Brexit, a force majeure clause is unlikely
to help by itself. But depending on how the clause
was dra ed, it might address delays in delivery of
goods due to cross-border issues.
Many contracts state that parties must
comply with applicable law. 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, o en specifying that charges can only
be increased in limited circumstances – with the
supplier required to consult with the customer
before making any changes to the services.
Many contracts contain a clause outlining a
procedure in the event that either party wishes
to make changes. This will typically involve
discussions, but only necessary legal or technical
changes can be compelled. Generally, there is no
right to terminate if a change is not agreed. Such
a clause may help if, for example, the services
covered by the contract must be performed
di erently to reflect a Brexit-related change in law.
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.
‘Frustration’ arises where
an event, like a change
in the law, occurs
a er 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.
The courts are unlikely to interpret a contract or
imply a term to assist a party adversely a ected
by Brexit, and will not relieve a party of 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 insu icient grounds for implying it.
Both interpretation and implication of terms are
related to the background knowledge reasonably
available to the parties at the time they entered the
contract. If they failed to include Brexit provisions,
it might be considered they have accepted any
additional costs, and risks should lie where they
fall.
FUTURE CONTRACTS
When it comes to dra ing future contracts, there
are various key areas that need to be considered.
It is crucial, for example, that territorial references
to the EU clarify whether this includes the UK, and
where the parties agree that certain events prompt
specified consequences (such as a renegotiation of
tari s), the contract deals with this appropriately.
By not dra ing 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 parties who can terminate
contracts at short notice, or who are confident
in their ability to perform regardless of Brexit’s
outcome.
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 a ect almost every aspect of
doing business, and the best a Brexit clause may
o er 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 were not envisaged.
Recent events have shown that the only current
certainty with Brexit is more uncertainty. Although
it’s di icult to predict the full impact of the UK’s
decision to leave the EU, without careful planning,
new and existing commercial contracts could be
a ected.
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 a er Brexit
sooner rather than later.
‘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 fulfi l the
contract.” ADVICE & OPINION