Although there is still uncertainty surrounding the timing of Brexit, the recent vote to delay the process has given organisations enough time to review their existing contracts and the obligations within them. Wright Hassall lawyer Lindsay Ellis looks at how to manage Brexit when signing commercial contracts.
Businesses within the leasing industry should consider the impact Brexit might have on existing contracts, not only for those proposed to come into force after the UK’s exit from the EU.
For many businesses, Brexit could negatively impact their supply chain and they should consider the performance of obligations by subcontractors and suppliers. This is particularly important for those who will be responsible for any increased costs or delays due to border issues.
Other key areas to consider include term, territory, currency, tariffs, customs clearance, resources, licensing and consents, and tax. Failure to review and plan for these could result in increased costs and/or damage to business performance.
These clauses can relieve a party from liability for a breach resulting from ‘circumstances beyond its reasonable control’. However, if Brexit was likely when the contract was agreed, it could be argued the parties should have planned for its effects.
Without a specific reference to Brexit, a force majeure clause is unlikely to help of itself, but depending how the clause was drafted, it might address delays in delivery of goods due to cross-border issues.
Many contracts state that parties must comply with applicable law. In any event, it will be a matter of interpretation whether such a clause could oblige a party to absorb the costs associated with Brexit-related changes in law.
Long-term contracts typically address what will happen if the law changes, often specifying that charges can only be increased in limited circumstances, with the supplier required to consult with the customer before making any necessary changes to the services being supplied.
The contract may include scope for termination, by either party. This may be in connection with circumstances arising from Brexit-related events or a failure to agree a change.
If a contract’s termination clause gives a party a right to terminate on relatively short notice, the prospect of termination can always be raised as a means of encouraging negotiation.
Frustration arises where an event occurs after the date of the contract, radically transforming the obligations of either party or making it impossible to fulfil the contract. However, a contract is not frustrated due to inconvenience, hardship, financial loss or when the event should have been foreseen by the parties.
It is generally accepted that frustration will not help with Brexit, although it might apply if certain changes in law were to be made subsequently, which would make it impossible to fulfil a contract.
The courts are unlikely to interpret a contract or imply a term to assist a party adversely affected by Brexit, and will not relieve a party from the consequences of their poor business practices if that involves departing from the natural meaning of the contract.
Similarly, the fairness of a proposed implied term or the fact that the parties would agree to it is insufficient grounds for implying it.
Both interpretation and implication of terms have regard to the background knowledge reasonably available to the parties at the time they entered the contract.
Inserting a ‘Brexit clause’ into contracts will trigger some change in the parties’ rights and obligations when a defined event occurs – this ‘if/then’ clause attempts to govern the outcome of a change.
Brexit could potentially affect almost every aspect of doing business, and the best a Brexit clause may offer is a binding requirement for the parties to try and renegotiate the contract.
For other contracts, it may be possible to specify the consequences of certain events, but with Brexit, there is the risk of events occuring that have not been previously considered.
Making the Changes
It is clear from recent events that the only current certainty with Brexit is more uncertainty.
Organisations must take the time to review their existing commercial contracts, ensuring every possible outcome is accounted for and the necessary clauses are added.
There are a range of avenues that should be explored, all of which can ensure the business’s future prosperity. Remember, existing obligations within contracts could be negatively impacted, and without taking the necessary steps, you are potentially inviting risk.
Seek advice from experienced contract lawyers and begin planning for life after Brexit sooner rather than later.
by Lindsay Ellis