As Brexit fatigue sets in across the nation, one of the many issues to be considered is how the final outcome, whatever it is, will impact upon commercial arrangements. Without an agreed deal or knowing what a deal will look like, it is difficult to plan for Brexit or know how it might impact your business. Many businesses will have contracts in place that were negotiated and agreed before Brexit and for a term that will run beyond Brexit. While Brexit is so up in the air, businesses and individuals are naturally cautious and concerned about the future.
While there is no “one-size fits all” approach to commercial contracts in the wake of Brexit, all businesses will benefit from reviewing their contracts and considering what can be done if they need to exit a contract or are negotiating new contracts.
Exiting a contract
It is unlikely to be possible to re-negotiate contracts that are already in place, but they might include provisions that allow you to terminate the contract early. Such clauses will likely require notice to be given and may include a termination payment.
Long-term contracts will often include a hardship clause. This will set out how the parties are to deal with a change of circumstances which results in one party being unduly burdened. Whether a hardship clause can be relied on by a party facing increased costs or a delayed supply chain will depend on how the clause is drafted. If one party successfully relies on a hardship clause, the contract will either set out what is to happen or changes will be negotiated between the parties.
A party to a contract can seek to bring the contract to an end on the basis of a “frustrating event”. The event must render performance of the contract impossible, illegal or radically different from what was contemplated by the parties. For an argument of frustration to succeed, the change in circumstances must be entirely unforeseen and not just unexpected. So far, frustration has not been successfully argued as a result of Brexit and it is, perhaps, ambitious to think such an argument will succeed, given its limited application.
Standard commercial contracts are also likely to include “force majeure” clauses. These clauses allow a party to be excused from their contractual duties following the occurrence of certain events. Such events are to be outside of the party’s control and a defined list of events may be included in the agreement. Recent case law suggests that Brexit is unlikely to be a force majeure event. New contracts may include Brexit related events in their force majeure clauses.
Material adverse change clauses are less frequently used in commercial contracts but are usually drafted in broader terms than force majeure clauses. They are most frequently used in lending or acquisition agreements and allow the buyer to exit the agreement where there is a material change in the target company. Material adverse change clauses can be used in times of uncertainty, allowing a party to walk away where a certain event has occurred.
For new contacts, in addition to considering the above clauses, businesses may also seek to include a Brexit clause in their agreement. Any Brexit clause will need to be drafted carefully considering the specific industry and the agreement in question. Such a clause would need to set out the trigger events and whether the agreement would be renegotiated or terminated on that event.
What you can do now
While it is difficult to plan for the unknown, it will be beneficial to:
- Review your existing contract terms;
- Consider how a hard or no-deal Brexit will affect your business and ability to perform existing contracts;
- Where possible, be flexible in new agreements; and
- Consider additional provisions, such as Brexit clauses, for new contracts.
If you have any questions regarding any of the above please contact John Andrews, Partner in our Corporate and Commercial team. John is contactable by email on [email protected] or by telephone on 020 8614 4589.
Other articles from April's newsletter
Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.