Many businesses will be party to long-term contracts that will straddle the date on which the UK will leave the EU. It is impossible to know at this stage precisely what the consequences of Brexit will be and consequently many businesses may find themselves caught as party to contracts that are no longer profitable, or which become onerous or damaging to fulfil. For example, this could arise from a change in law or regulation, from unavailability of appropriate workers to fulfil the contract or from exchange rate fluctuations.
Where contracts are not yet in force an active approach to Brexit should be taken within contracts and negotiations to ensure as far as possible that any key risks are mitigated or are allocated appropriately within the contract. Brexit clauses (as mentioned below) can be a useful way of doing so.
Where a party to a commercial contract is negatively affected by the consequences of Brexit they will need to examine the contract to see whether any relief is available or how quickly they can bring the contract to an end. Potential sources of contractual relief for affected commercial contracts include:
- this is the doctrine that a contract can be discharged when something occurs after contract formation which makes it physically or commercially impossible to fulfil, or changes the obligation to perform it into a radically different obligation from when the contract was entered into;
- this may be difficult to rely on in most cases as it needs to (a) be so fundamental to strike at the root of the contract and be beyond what was contemplated by the parties at the time of entering into the contract; and (b) render performance impossible or illegal or radically different from what was originally contemplated – i.e. not just less beneficial or more expensive to perform;
- Compliance with law:
- most commercial contracts oblige the parties to comply with law and some contracts also specify who will bear the cost of complying with changes in law that affect the services being provided – this may or may not be triggered (e.g. exchange rate changes are unlikely to trigger it);
- Change control clauses:
- these allow for a party to request a change to the services being provided under a prescribed procedure set out in the contract;
- it may or may not be possible to compel the change and the price and terms for doing so may not be favourable – it will come down to the drafting of the clause in question;
- Force majeure clauses:
- these usually provide relief where a party is prevented from complying with the contract due to causes outside of its reasonable control;
- force majeure clauses are very common, but in the vast majority of cases they are unlikely to be triggered by Brexit;
- Material adverse change clauses:
- these are not as common as force majeure clauses. They provide for specified consequences in the event that there is a material adverse change affecting one of the parties to the contract, e.g. in the context of finance documents, they usually allow the lender to determine that an event of default has occurred and call in the loan, whereas in the context of corporate acquisitions, they usually allow the buyer to back out of a transaction that has exchanged but not yet completed;
- Brexit clauses:
- these are essentially a type of material adverse change clause that is specific to specific events (e.g. changes in law, trade tariffs, currency fluctuations) or particular adverse impacts caused by Brexit (e.g. inability to perform, increased cost in performance, pricing triggers vs similar goods, inability for customer to use/sell);
- they may provide for a renegotiation and/or a right of termination;
- it may be possible to renegotiate contracts with sympathetic parties where there is no express contractual rights to do so – it will depend on the commercial relationship of the parties;
- Terminate the contract?
- an unrelated, independent right to terminate may have arisen, either due to a contractual right or a breach of the other party that has occurred.
The correct action to take will, of course, vary for each contract and for each business. If you require advice on appropriate drafting to mitigate contractual risk or if you are party to a contract that is proving damaging to your business you can contact our specialist solicitors on 0161 941 4000 or email firstname.lastname@example.org.