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April 19, 2017

BREXIT UNCERTAINTY

A solution for minimising the potential impact on trading could be to introduce a Brexit clause into new contracts. The objective of such a Brexit clause would be to trigger a change in rights and obligations as a result of an event occurring.


Brexit Clauses

There are two main catagories:

  • A Specific event, specified consequence.

An example of this would be a fluctuation of the currency exchange rate resulting in the price of the products being adjusted. A risk here might be when a different event not specifically provided for occurs. For such instances you could consider a:

  • Trigger, renegotiation, termination

An example is the imposition of a price increase or penalty resulting in the renegotiation of the contract. If no deal can be made, either party are able to terminate. The risk here is that the unaffected party faces the choice of accepting less favourable terms or early termination. The risk for the affected party may be where the trigger is too narrow to capture what has happened. In addition, it is not guarenteed that a new deal may be reached.

So what are the risks?

By not instigating a Brexit clause it means a party must continue to perform its obligations, even if doing so has become commercially unattractive. Inability to renegotiate a contract may result in a breach of contract and subsequent termination and/or an action for damages. The following situations may justify exclusion of such clauses:

  • Confidence that the ability to perform duties and costs of performance remain unaffected by Brexit or their current contracts sufficiently cater for such instances
  • The risks are less than introducing a Brexit clause. Many customers may be in this position
  • Contracts are short-term and may be revised to address the impact of Brexit
  • A right to terminate without penalty on short notice

Existing clauses

Many companies will already have clauses in their existing contracts that can be applied to minimise the impact post-Brexit. Examples of these include the following:

  1. Force majeure (FM) clause: Brexit is outside the control of both parties. Whether the clause can be invoked depends on its interpretation. Without express reference to Brexit, it is unlikely to assist because Brexit was a possibility when the contract was entered into, therefore parties could have planned for its effects. Additionally, a change in economic/market circumstances are not generally accepted as being FM events.
  2. Material adverse change (MAC) clause: More common in lending transactions (for adverse change in the borrower's circumstances) or in corporate acquisition agreements (where detrimental events occur to the target company). Whether Brexit triggers a MAC clause depends on how it is drafted.
  3. Compliance with law clauses: Where a contract states parties must comply with applicable law as amended from time to time, it is a matter of interpretation whether this could oblige a party to absorb costs associated with Brexit-related changes in law.
  4. Change control clause: Sets out a procedure when either party wishes to change the contract. This may assist where performance of the contract needs changing to reflect a Brexit-related changes in law. However, the default position on costs may be inappropriate and generally there is no right to terminate if a change is not agreed.
  5. Hardship clause: Dictates which party bears the burden of increased costs of supply, fluctuations in exchange rates and other changes. Whether such a clause can be invoked by a Brexit-related event depends on how the clause is drafted. The clause may only offer limited assistance. How changes are made and what happens where an agreement cannot be reached must be addressed.
  6. Termination rights: If termination notice is relatively short, a Brexit clause may not be necessary.

Considerations

Suppliers will need to be mindful of the direct impact on their obligations as well as other factors that could affect their supply chain.

Customers will need to be mindful of the impacts on their ability to use the goods or services purchased under an agreement, as well as how competitive the prices they are paying and how the market for their own products may be affected.

Possibilities:

  1. Trade tariffs on goods: New or increased tariffs may be payable on both imports and exports, whether for raw materials, components or finished products. This may affect the costs incurred by a supplier or the market into which the customer sells the goods.
  2. Freedom to provide services: New restrictions may apply to the provision of services. Costs may be involved in complying with these restrictions.
  3. Licences and consents: May no longer benefit from EU-wide approval schemes/arrangements.
  4. Freedom of movement for workers: UK nationals' ability to work in EU member states could be curtailed. This could affect the ability to perform contracts or the costs of performance.
  5. Changes in law: EU Regulations will no longer have direct effect and although the Great Repeal Bill will initially preserve the status quo, the UK may repeal or amend laws implemented by EU Directives.
  6. Currency exchange rates: Uncertainty about the UK economy may result in fluctuations in the exchange rate. This may impact the value of sums paid and received under a contract.

 

This article was first published on Insider Media on the 17th April 17.

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