Existing contracts - what should be considered?
Business Change - Organisations must first consider which contracts will be affected. For example, if the business intends to relocate some operations, will contracts related to the previous/new location need to be terminated or re-negotiated? What are the cost implications?
Term - Will the contract still be in force after Brexit? If the contract will end before, could it be extended (in particular, unilaterally)?
Flexibility - How flexible is the contract? For example, can the contract be terminated at short notice, by either party? Similarly, is the contract for long term supply or service, are there minimum purchase commitments or is it an ‘at will’ arrangement?
Supply Chain - How will Brexit impact the supply chain? Organisations must consider the performance and cost of performance by subcontractors and suppliers, looking at how robust the respective subcontracts are and if any costs can be passed on.
Territory - Does the agreement contain territorial references to ‘the EU’ and how is it defined? Will it include the UK after Brexit? This will be important for many commercial agreements, particularly agency, distribution, franchising and other licensing arrangements.
Currency - In what currency must payments be made and are the prices fixed in one currency? Who bears the risk of exchange rate fluctuations during the contract term and can charges be amended to reflect the exchange rate?
Tariffs - Who pays tariffs? Could the provision of goods or services become subject to additional/increased tariffs on exports to and imports from the EU, or to and from countries the EU has a trade deal with? Are sales subject to Incoterms? Which ones?
Customs Clearance - Who is responsible for customs clearance? Who covers the cost of managing this process? How will customs control impact agreed service levels and delivery timetables/obligations?
Service Provision – Location - Will the provision of services be restricted, including from where they come, whether to EU member states or other countries? What cost implications may arise?
Resource – Labour - Could a risk of labour shortages lead to delays/difficulties in performing obligations? Will the loss of freedom of movement post-Brexit, lead to increased labour costs?
Licensing/Standards - Could either party (or their personnel) lose the benefit/recognition of EU-wide licensing or approval arrangements?
Data Protection - Are there data transfers from the: EU to the UK; UK to EU; and/or other countries (where such transfers could impact on arrangements with the EU)? If so, will Standard Contractual Clauses or other mechanisms be needed to ensure those transfers can continue post-Brexit? Read Brexit and Data Protection for more detail.
Tax - Will Brexit result in a tax changes? Will Brexit result in changes to the tax treatment of payments under the contract, for example changes to the way VAT is applied? Who will be responsible for this?
Brexit and existing contract provisions
A contract affected by Brexit may contain existing provisions that offer some protection or recourse:
Contracts often include force majeure clauses to relieve a party from liability for a breach resulting from ‘circumstances beyond its reasonable control’, if it can show it took steps to avoid its operation or mitigate its results.
If Brexit was likely when the contract was entered into, it could be argued the parties could and should have planned for its effects.
In general, without a specific reference to Brexit, force majeure clauses are unlikely to help. However, depending how the clause was drafted, it might address delays in delivery of goods due to cross-border issues, for example.
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 on the basis of circumstances known when agreeing a contract.
Compliance with law clauses
Many contracts state the parties must comply with applicable law, but if not, it will generally be a matter of interpretation. It is still likely to be a matter of interpretation whether such a clause could oblige a party to absorb the costs associated with a Brexit-related change in law.
Long-form agreements, like outsourcing, typically address what will happen if the law changes, often specifying that charges cannot be increased. The supplier will be required to consult with the customer before making any necessary changes to the services.
Long-term agreements will also often contain a clause outlining a procedure if either party wishes to change the contract. These will usually involve discussions, with only necessary legal or technical changes able to be compelled - generally, there is no right to terminate if a (non-essential) 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.
Long-term agreements may contain clauses covering which party bears the increase cost of supply, fluctuations in interest or exchange rates, and other changes to factors the parties considered when agreeing the deal.
When a Brexit-related event impacts an agreement, whether a clause can be invoked depends entirely on how it is drafted and even then, it may only offer limited assistance. Will changes be agreed according to a pre-determined mechanism or re-negotiated and what happens if no agreement is reached?
The contract may include scope for termination, by either party. This may be in connection with circumstances arising from Brexit or a failure to agree a change or, potentially, for convenience (although subject to some form of compensation).
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.
We have considered how contract law might work to mitigate the likely impact of Brexit, if and when it occurs, but what help is offered by common law?
Frustration arises where an event like a change in the law, occurs after the date of the contract, without the fault of either party that either radically transforms the obligations, or makes it physically or commercially impossible to fulfil the contract.
However, a contract is not frustrated due to inconvenience, hardship or financial loss or when the event should have been foreseen by the parties.
In Brexit terms, it is unlikely the law of frustration will help, but it might apply where certain laws arising from or changes in events due to Brexit 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 (by itself) 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.
There is little doubt Brexit is the biggest issue faced by many businesses in the UK and we hope our focus on how existing provisions in your commercial contracts may help mitigate the impact of Brexit related changes.