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February 13, 2018

Accounting for the unknown: updating commercial contracts ahead of Brexit

Despite widespread commentary about a “hard Brexit”, many of the larger global financial institutions have published reports in the past 6-12 months which are consistent to the extent they see that option receding from view.

Regardless, it now seems fairly certain that the UK will officially cease to be part of the EU in Spring 2019, and the transition – in whatever form – has the potential to impact commercial relationships between businesses in the UK and their counterparties in the UK, EU and outside the EU.

Reviewing existing contracts

In view of that, businesses should consider carrying out an audit of their key contracts to assess the effects, if any, of likely changes including:

  • import/export duties on goods and services supplied between the UK and the EU
  • new or increased non-tariff barriers (documentation requirements, customs checks)
  • restrictions on the free movement of people
  • fluctuations in exchange rates
  • tax treatment of goods or services

If contracts do not contain an express Brexit clause which addresses such eventualities and their potential impacts on the parties, it is worth reviewing other provisions, in particular:

  • Force majeure: this can protect you from fulfilling your obligations if there is a change of events outside of your control. Given there is no recognised meaning in English law, whether or not such a clause can be relied upon post-Brexit will depend on the exact wording.
  • Termination: the circumstances under which the contract can be ended. It is unlikely that Brexit will be specifically covered, so it is important to review whether termination for convenience is permitted.

Failing the above, it may be worth exploring whether the contract has been frustrated, in which case it would come to an end. However the test for frustration of a contract is high; an event must cause performance to be impossible, illegal or radically different and not just more expensive or more onerous. This means it is likely there will be only a small number of cases where contracts will be frustrated by Brexit.

Key considerations for new contracts

Any party considering entering a new contract between now and Spring 2019 should therefore consider and discuss with their counterparty how their respective interests may be affected by Brexit, and what flexibility the contract should provide for. At what point should adverse commercial impact on the parties as a result of Brexit trigger a force majeure clause? When drafting termination provisions, can the parties find a balance between on the one hand affording flexibility in the event a party’s commercial position is significantly worsened by the impact of Brexit (and how should “significantly” be quantified?) and on the other hand reasonable commercial certainty of the contract?

In addition, there are a number of considerations the parties should be mindful of when drafting, including how “EU” and “EU legislation” are defined in the contract, and also the effect of Brexit on jurisdiction and enforcement as between the UK and EU member states.

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