Commercial contracts in the wake of Brexit
Monday, 28th November 2016
Following the announcement by Theresa May, on 2 October 2016, that Article 50 of the Treaty on European Union will be triggered before the end of March 2017, preparations will need to be made for the impact that Brexit will have on organisations and their commercial dealings.
The statutory impact of Brexit on English contract law will be limited due to its roots in the common law, as opposed to prescriptive statute, although there are certain areas that this will not be true of, including agency and consumer regulation. However, the interpretation of contracts may change and the commercial deal itself may not have the same value in light of Brexit. Businesses should therefore review existing contracts and future-proof new contracts in preparation for Brexit.
Financial Implications in Contracts
Changes in exchange rates will be an important consideration when drafting contracts with an international element. The fall of the pound following the announcement of the EU referendum result in June was evidence of the turbulent nature of the international currency exchange rates. Contracts will need to be able to provide for and guard against potential losses as a result of currency fluctuations.
In addition, Brexit could see the imposition of tariffs on import and export of goods to and from the EU. Tariff rates with countries outside the EU will also need to be renegotiated which could result in higher supply costs to be borne by suppliers. Suppliers may look to pass these additional costs onto customers, something that customers should be aware of when dealing with their suppliers in the coming months.
Possible delays from increased customs checks for goods entering and leaving the EU along with the increase in cost for goods being transported, may have knock-on financial implications for suppliers working to strict deadlines with financial penalties should they fail to meet them. Again, contracts will need to be flexible enough to absorb these changes and to ensure that parties are able to meet their obligations without onerous effort or financial burden. Open channels of communication between parties will be important in assisting with achieving this.
Restrictions on the freedom of movement of workers from the EU into the UK could cause a shortage of labour or increase the costs of labour, or both, which could affect business's ability to meet their obligations under existing contracts. The increased cost will also have an effect on profit margins and operating costs budgets which may not have been anticipated at the time of contract signature. Customers should be aware that suppliers may attempt to pass these increased costs on, to mitigate their own losses.
Future-proofing for Financial Implications
For those looking to enter into new contracts ahead of Brexit, future-proofing will be key in ensuring a workable solution for all parties, regardless of the unknowns faced. This will involve including express provisions to cater for the potential events listed above. For example, provisions that will protect against movements in exchange rates, or provisions that will anticipate the increase or imposition of tariffs by passing the cost on to the customer. Businesses should seek to ensure they are not obliged to absorb costs where they have not factored for this commercially. Appropriate termination rights or caps and limitations on any variations to charges should be considered in light of the potential financial implications imposed by Brexit.
For existing contracts, it will be important to check provisions on material adverse change, as the financial hardship that may occur as a result of Brexit could be serious enough to potentially trigger the right to terminate.
Standard force majeure clauses may provide protection for a party seeking relief from its obligations. However, any narrowly defined force majeure provisions that only provide relief in the event that obligations are rendered impossible to perform as a result of a force majeure event are unlikely to be met solely as a result of increased costs under the contract.
Parties need to understand the risk that Brexit poses to their particular commercial dealings and assess now whether there is any ability to renegotiate, vary the terms, limit their risk under the contract, or potentially terminate.
References to the EU and Incorporation of EU Law
It has been queried whether reference to the EU in contracts will continue to include the UK following Brexit. This will depend on the context and purpose of the clause.
A contract that includes the definition of the EU by reference to its member states "from time to time" indicates that the UK will not be included post-Brexit. However, a contract which includes a definition of the EU as a list of the countries, including the UK, indicates that the UK will continue to be included in such definition which will affect the continued applicability of a clause to the UK.
Contracts that are ambiguous on this point will need to be considered within the wider commercial background and a common sense approach should be taken.
Future-proofing for References to the EU
For contracts entered into in anticipation of Brexit, future-proofing should be undertaken by the inclusion of an express provision which defines whether the EU includes the UK after Brexit. There should also be provisions to expressly incorporate modification of legislation into the contract. This could be achieved by stating that references to laws will include modifications, re-enactments, revocations or consolidations of that law. Parties could also consider incorporating the Interpretation Act 1978 which provides clarity on the interpretation of ambiguous contractual provisions.
Organisations could consider implementing the following:
- Start to think about how Brexit may impact on their business and commercial arrangements with third parties.
- Flag key contracts for these arrangements. Assess whether they provide sufficient protection against Brexit.
- Consider whether these contracts may need to be renegotiated or amended in light of the implications of Brexit.
- Check contract termination dates as, if the contract is due to expire prior to March 2019, no changes may be necessary.
Future-proofing provisions could include:
- Express provision for the financial impact of Brexit; for example changes to exchange rates, tariffs or customs procedures.
- Express provision as to whether references to the EU include the UK post-Brexit.
- Clarifying whether references to EU law include the legislation that will succeed that law in the UK.