With the UK's exit from the European Union impending, it is important that businesses review their current and future commercial contracts to consider the financial impact that Brexit will have on them. Case law has suggested that parties will be bound by the wording of the contract and there will be little relief for those who are unfavourably affected by Brexit. In light of this, Greenaway Scott will consider the importance of inserting a Brexit clause into commercial contracts to protect against subsequent financial risks.
What is a Brexit clause?
A Brexit clause is a provision that can be inserted into existing commercial contracts or those commencing post-Brexit. They expressly deal with situations that may arise that can affect a party's ability to perform or the cost of performing its obligations under a contract.
What should a Brexit clause cover?
There are two types of Brexit clauses: specific events/specific consequences and trigger events which require parties to renegotiate or terminate the contract. These are not mutually exclusive - they may be combined in any contract.
A Brexit clause could cover a specific event such as a fluctuation in currency exchange rates, which will then require the price of the products or services to be adjusted in line with the current exchange rates. These should be carefully considered by the parties to ensure that they capture any potential risks to their businesses, as the risk of inserting this type of clause is that if a different event or additional events occur, they are not expressly provided for.
A Brexit clause could also cover trigger events that cause a change in a party's rights and obligations under the contract, such as the imposition of tariffs (which increases costs under the contract). This would allow the affected party to either renegotiate or terminate the contract if a compromise could not be reached. The risk with this, is that the unaffected party faces renegotiating and accepting less favourable terms or early termination by the affected party. In addition, the affected party may not be able to rely on the Brexit clause as the event that occurred may not be captured. As a result, both parties must ensure the impact is balanced against the value of the contract and the parties' rights/obligations within it.
What are the benefits of a Brexit clause?
Parties should seriously consider inserting relevant protection to cover certain Brexit scenarios into their current and future contracts for the following reasons:
- To avoid being exposed to onerous obligations that place further financial burden upon them.
- A party may be unable to renegotiate the contract and as a result they could face possible liabilities for breaching the contract, including a claim for damages or termination by the other party.
- To allow parties to be flexible and adapt to Brexit developments as they progress, without a contract becoming frustrated due to the incapability of performance by a party.
There is no 'one size fits all' approach but it is beneficial for parties to consider potential risks and negotiate relevant provisions into their contracts. This will allow flexibility and allow the parties to react to any changes as the Brexit process progresses, whilst protecting their businesses as much as possible.
The information contained in this article is for information purposes only and is not intended to constitute legal advice. If you require further information our commercial team would be more than happy to assist you. Please contact us at firstname.lastname@example.org or call us on 029 2009 5500 to speak to one of our team.