Brexit and contracts: a practical guide

Whilst we can’t give a definitive guide to the impact of Brexit on commercial contracts, set out below is a simple guide to what we know so far – and what practical steps you can take to help you prepare for the future.

Force majeure and the value of the pound

Many commercial contracts contain a “force majeure” clause, which allows a party to be excused performance if they are prevented from doing so by an event that is outside of their control.

The referendum result itself is unlikely to be a “force majeure” event that gives rise to a right to suspend performance or terminate an existing contract, even if recent events have made performance of the contract unprofitable or loss-making for one of the parties.

The depreciation of the pound in the immediate aftermath of the “leave” vote means that it could be more expensive to import goods or raw materials.

Currency fluctuations are nothing new for UK businesses, and some exporters may well benefit from a fall in the value of the pound, but if a business thinks that it could be adversely impacted by further fluctuations as the exit negotiations progress, then appropriate strategies should be adopted.

In addition to discussing hedging strategies with their bank, businesses should consider whether it would be in their interests to include price variation clauses in any new contracts, so that margins can be maintained in the event of further changes in the value of the pound.

Changes in English Law

Businesses always live with the possibility that the legal or regulatory framework within which they operate might change.

However, Brexit is an event which has the capacity to give rise to significant changes in our laws, although it is not clear at this stage what might change, or when it will change, or even whether there will be a material amount of change at all.

Much EU law has been enacted into English Law by legislation in the UK, which will remain in force when we leave the EU unless a positive step is taken to change it.

The UK has been a part of the EU for over 40 years and its laws and regulatory structures are hugely intertwined with the those of the EU as a result – so unpicking the EU elements of our laws would be an enormous task, and may even be impossible in a number of areas if we want to retain access to the single market.

Businesses should, however, be attuned to the possibility of change in the legal and regulatory context within which they operate. They should be prepared to respond to such changes and consider how such costs should be allocated within their supply chain.

Trading arrangements

Trade between member states of the EU is premised upon free movement, and therefore there being no tariffs, quotas or barriers. Some businesses rely upon harmonised regulatory frameworks so that their goods and services can be marketed in the EU.

Brexit will challenge these certainties – in a worst case scenario, a contract could become more costly or impossible to perform. Businesses should keep under review whether they might find themselves in this position.

As with currency fluctuations, it would be inadvisable to try to rely on concepts such as “force majeure” to avoid having to perform a contract that is negatively impacted by the terms of our exit, and so businesses should consider the inclusion of specific terms that deal with exit from the EU.

Such a clause could, for example, trigger a price renegotiation, or give one party an ability to terminate the contract in specified circumstances.

Territory terms

Many contracts contain descriptions of territory – for example, the area within which an agent or distributor is appointed, or the area within which a licence can be exploited.

For obvious reasons, if a contract refers to the EU, then there is the potential for uncertainty as to whether this means the EU as it stands on the date on which the contract is signed, or the countries which comprise the EU at any given point in time during the term of the contract.

This issue is not new, of course, as new countries have regularly joined the EU. However, a country has never left the EU before, and given the size of the UK economy, the issue now has a different complexion.

Businesses should review their existing agreements to determine whether they might give rise to a problem in this regard, and clear language should be used in all future agreements to avoid any ambiguity as to territorial extent.

Choice of law and jurisdiction

Parties generally agree in a contract which country’s law will govern the arrangements between them, and which country’s courts will have the ability to decide any disputes that arise.

EU law makes such choices binding within the EU, with some limited exceptions. EU law also provides that a judgement obtained in one EU country can be enforced in another, meaning that a case doesn’t need to be reheard in the country where the defendants’ assets were located in order that financial awards could be enforced and satisfied.

Whilst the EU regime was relatively easy to understand, leaving the EU has the potential to cause some uncertainty in an already complex area of law.

There is currently no certainty as to how this will be resolved – the Government will have to decide how to replace the EU rules which currently apply.

How Ward Hadaway can help

It is unlikely that the uncertainties described above will be resolved in the short term. Businesses will have to take steps to assess the risks that Brexit presents to them.

At Ward Hadaway, our experienced commercial team can assist with a review of the legal and regulatory aspects of your particular situation.

For more details on how we can help, please get in touch.

For further information the impact and implications of Brexit, check out our comprehensive Brexit guide.