The UK has started the process of leaving the EU. This is already having an impact on exchange rates and creating uncertainty.
In light of this it is prudent to consider the contents of your commercial contracts – both domestic and international – particularly if the contract is likely to continue after the UK leaves the EU, or if it may be impacted by the process of leaving.
Impacts on suppliers and customers
Suppliers need to consider not only events which may impact on them, but also anything that may affect the supply chain. Customers need to consider the impacts on them and any of their own customers and competitively acquire goods or services.
Some potential impacts of a ‘hard’ Brexit that we believe may have an effect on contracts include:
- Freedom to provide services: New restrictions may apply, with attendant costs in compliance
- Freedom of movement of workers: Restrictions could increase overheads, or affect the ability of businesses to perform contracts
- Trade tariffs on goods: New or increased tariffs may be payable on both imports and exports, affecting the market into which the customer sells the goods or the costs incurred by the supplier
- Changes in law: EU regulations will no longer have direct effect; Although it is likely that the government will initially preserve the status quo, it may subsequently look to make changes
- Licences and consent: UK- based businesses may no longer benefit from pan-EU approval schemes or reciprocal arrangements with organisations outside the EU
- Currency exchange rates: Uncertainty about the UK economy may result in further exchange rate fluctuations
- Other financial factors: Consumer spending may dip. There may be a rise in inflation and borrowing costs
The risk of not ensuring that commercial arrangements address Brexit is that a party will be obliged to continue to perform its obligations in full, even if doing so has become commercially unattractive or impossible as a result of Brexit related events For example, an affected party may find themselves to be in breach of contract, facing a claim for damages and even termination for default.
To what extent is the law likely to assist a party who is adversely affected by Brexit?
Under general UK law, a contract will be ’’frustrated’’ if it is genuinely impossible to perform. If a contract is frustrated, both parties will be released from further performance of the contract. However a claim that a Brexit related event frustrates a contract may be unsuccessful. For example, if Brexit was in the parties’ minds when the contract was agreed, performance of the contract also genuinely has to be impossible. It is not enough that it is simply more difficult or expensive to perform.
The UK courts may, in certain circumstances, look to interpret a contract in a way which will cater for certain situations affecting both parties, or even imply an additional term into the agreement. However, simply assuming that the courts will interpret a contract in a way which will assist a person who is adversely affected by Brexit is a high risk strategy.
Parties should accordingly not rely on the wider UK law to shield them from the impact of Brexit on their contracts.
If you have ’’standard’ terms and conditions in place, will these need to be changed?
Many businesses rely on standard form terms and conditions which include clauses which may or may not offer some comfort. One such clause commonly seen in supply agreements (standard form or otherwise) is a ’force majeure’ clause, which states that a party may be excused a breach of contract where the breach is caused by a factor outside their control, which has made performance of its obligations impossible. Such contracts may also have ’material adverse change’ clauses, which allow a party to walk away from the contract if they suffer some form of detrimental effect.
The precise drafting of such clauses will have a bearing on whether they will offer a party any comfort or not. However, if Brexit was a possibility when the contract was entered into, the courts may take the view that the parties should have planned for its effects and are, accordingly, unable to rely on such clauses.
What steps should we take?
Businesses will need to consider a range of additional commercial factors when agreeing contractual arrangements. It is prudent to consider the inclusion of a ’Brexit clause’ into standard terms and conditions and bespoke contracts to cater for specific identifiable issues that might arise. The incorporation of a Brexit clause within commercial contracts will not be a silver bullet to remove all Brexit related uncertainty. However, it is a measure that can be adopted to navigate through and mitigate some of the effects of Brexit.
This article outlines the position under UK law; if contracts are to be interpreted in accordance with the law of other jurisdictions, the legal position may well be different.