10 December 2019

BREXIT AND COMMERCIAL CONTRACTS

There has been much uncertainty about the UK’s exit from the EU. This uncertainty is set to continue because of the general election and the deadline for Brexit having been extended yet again to 31 January 2020.

People of the UK are worn down because of the disruption this intention carries with it; businesses are still on tender hooks to see what the outcome will be and what impact Brexit will have on their industry and finances.

One active step that businesses can take is to review its contracts. The writer has set out some of the areas below that you may wish to review in your contracts.

TERRITORY

The definition of territory in your contract will be important, particularly if you have a franchise agreement, distributorship agreement, licence of intellectual property rights, or contracts that have restrictive covenants and non-competition provisions. If the territory is defined as the ‘EU’, then post-Brexit the UK would not be included in that definition. Consider how your business will be affected if the UK is not included in the definition of ‘territory’. If the UK is critical to the territories in which you trade, consider varying the contract.

In a new contract consider carefully the territories you require and possibly name the countries individually. This would deal with the possibility of other Member States leaving the EU. Also, you should keep in mind whether referring to the UK is adequate, particularly in the event of a future devolution of Scotland. Therefore, you may consider a general clause which gives the parties flexibility in terms of future geographical changes.

CONTRACT PRICE

There is a possibility that the contract price may increase due to changes in import or export duties, tariffs or taxes. The supplier may be able to pass such increased cost of production or supply to its customer under the terms of the contract.

Your contract may provide for situations when the price can be changed and the percentage by which it can increase. Often there is a clause in the contract that allows a supplier to increase the price if there are changes to the costs of production.

In existing contracts, you would need to assess the possible level of increased costs and whether these can be passed on to customers. For customers, you will need to see whether there is a provision capping how much the price can be increased.

In new contracts perhaps consider the impact of increased import and export costs and whether there needs to be an express clause added into the contract to cover such issues.

TERMINATION

On what basis can you terminate the contract? Can you terminate as a result of Brexit? Can you terminate early? What is the cost of termination? These are some questions you may be asking.

Some contracts may have hardship clauses which would allow a party that is facing increased costs or delays to the supply chain to renegotiate the contract or terminate. Whether a party can terminate or renegotiate a contract will depend upon the wording of that contract. It would be difficult to terminate a contract for any perceived hardship post-Brexit if this has not specifically been provided for. In new contracts you may wish to consider including an early break or notice clause.

Under English law, a party can terminate a contract if the contract is frustrated. This means if an event has occurred that renders the performance of the contract illegal, impossible, or radically different to what was originally contemplated by the parties. The effect of frustration is to end the contract and discharge the parties from further liability. In a recent case decided upon this year (Canary Wharf (BP4) T1 Ltd & ors v European Medicines Agency [2019]), the High Court held that a commercial lease would not be frustrated because of the UK’s withdrawal from the EU.

A force majeure clause could be used by a party to end the contract. On exercising such a clause, a party can cease all its obligations if an event occurred that was unforeseeable and beyond the reasonable control of the parties. There may be a list of events that would be included in a definition of ‘force majeure’ such as adverse weather conditions, flood, war, or terrorist attack. Unless, Brexit is specifically referred to as a force majeure event then it would not be interpreted as being included in the definition of ‘force majeure’. This is because it is not regarded as an unforeseeable event. In the Canary Wharf case, referred to above, the High Court had said that Brexit would not be regarded as a force majeure event.

It could be argued that any adverse effects occurring as a result of Brexit (rather than the event of Brexit itself) could be said to be unforeseeable and therefore be interpreted to be an event of force majeure.

The Canary Wharf case sets precedent (for now) that the event of Brexit cannot be used to end a contract, but the High Court in that case had allowed an appeal to the Court of Appeal. This appeal was withdrawn earlier this year as the parties reached settlement. Therefore, unfortunately we will not be able to benefit from any Court of Appeal guidance on this issue.

STEPS TO TAKE

1. Review existing contracts and assess the financial impact of Brexit.

2. Consider whether you will still be able to perform your obligations under the contract? If not, what measures can you put in place to continue? What will be the consequences if you are deemed to be in breach of contract?

3. Is there a possibility that the contract could be amended? Look at things such as amending the definition of territory or changing the provisions on price adjustment.

4. When entering into new contracts bear in mind the above and see if a specific Brexit clause can be included. If you want any effects of Brexit to be an event of force majeure then the contact should specifically provide for this. Also, you could consider including an early break or notice clause.

If you require assistance with any of the above issues, please do call Howell-Jones commercial team on 020 8549 5186, who will be happy to assist.

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