The Brexit Effect

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 affect 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, tariffs, 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 drafting, 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 effects.

Without a specific reference to Brexit, a force majeure clause is unlikely to help by itself. But depending on how the clause was drafted, 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, often 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 differently 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 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.

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 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 insufficient 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 drafting 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 tariffs), the contract deals with this appropriately.

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 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 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 were not envisaged.

Recent events have shown that the only current certainty with Brexit is more uncertainty. Although it’s difficult to predict the full impact of the UK’s decision to leave the EU, without careful planning, new and existing commercial contracts could be affected.

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.