BREXIT boredom may lead to Contract Catastrophe

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BREXIT boredom may lead to Contract Catastrophe

Will your contract terms be fit for purpose in a post-Brexit World?

Angela Kerry an Associate in our Corporate Commercial team looks at the problems Brexit could bring

Like the cat in the photograph we are all pretty bored of Brexit by now. It is in the news every day and the message is depressing to say the least. It is difficult to say where it is going. Deal no deal? There are also still talks of another referendum bubbling along.

Hopefully this article will lead you at the very least to consider whether any contract terms you deal with will survive what happens post Brexit. And by contract terms I mean any kind of contract, be it your T&C’s, employment contracts, shareholder agreements – anything could be affected. The final impact will depend on whether it is a ‘hard’ or ‘soft’ Brexit.

In short if it is ‘hard’ then the UK will cease to be part of a customs union and will be no longer obliged to comply with EU law. A ‘soft’ Brexit may leave the UK with some form of free trade agreement or a ‘special’ relationship with the EU. It is wise to work on the premise of a ‘hard’ Brexit to be prepared for the worst case scenario.

Obviously the impact of Brexit will be more far-reaching than just contractual terms. The free movement of people, human rights, employment law and taxation, amongst many other areas, will be impacted on one way or another. On a lighter note bananas will be free from EU regulation!

To be clear membership of the EU committed us to the supremacy of the Union with regard to our legal rules. If we leave, we are no longer bound by this and are free to determine our own laws once again.

So what is the problem for contract terms? The impact could range from the commercial viability of a contract, to the interpretation of contractual terms and maybe even the question of enforceability of judgements across the EU where there is a dispute.

I’m going to leave questions on the enforcement of judgements to the litigators and focus on the commercial viability of contacts.

The commercial viability of contacts may be:

  • Whether the obligations can continue to be enforceable. For instance will a commercial agent, in the EU sense that we know them now, have the protection of the Commercial Agent Regulations, particularly on notice provisions and restrictive covenants?
  • A post-Brexit world could mean the imposition of tariffs currently not anticipated or factored into the costing of the contractual arrangements. Leaving the EU could mean the UK faces trade barriers and therefore new taxes or other levies. This of course may be a two way street when supplying goods and/or services to the EU or when acquiring them from an EU member state into the UK.
  • There may be increasingly complex regulatory requirements. For instance there may be parallel regulatory regimes under UK and EU law. This could inevitably increase the cost of compliance and then consideration under contract terms as to which party should bear the cost.
  • The location of the business and its customers, the regulatory environment and any employees could all have to change which will of course incur costs which may not be manageable.

One of the key questions to be addressed in whether your current contract arrangements will enable you to deal with a post-Brexit world, whatever shape that may be, is how are the terms currently drafted?

  • If the contract contains clauses that enable a party to renegotiate or pull out of the deal on the premise that there has been a ‘material adverse change’ then it is possible that relief may be granted. This usually applies to finance agreements.
  • Economic hardship in itself is not usually a ground that would enable one or other party to obtain relief.
  • Are there price review clauses that enable the parties to look at the pricing mechanisms within the contract and change them in the face of a potential breakdown of the relationship?

Most well drafted contracts should contain a force majeure clause. Force majeure clauses are aimed at dealing with unforeseen circumstances that mean the parties are no longer able to perform some or all of the contract due to circumstances beyond their control.  The question has therefore been discussed as to whether a force majeure clause could provide some relief to contracts affected by the UK leaving the EU. Unfortunately such clauses do not usually cover the increases in costs of a contract. In any event even if they could, arguably any contracts concluded after the referendum (23 June 2016) will have been drafted in light of Brexit (hard or soft) and therefore not something that is unforeseen.

So what should businesses do about this issue?

The UK is not due to leave the EU until March 2019 most EU legislation will continue to apply until 31st December 2020. The so-called transition period. It is wise therefore to consider to:

  • Conducting a health-check and audit – what are the current arrangements and how might Brexit affect them, particularly your arrangements with third parties?
  • Reviewing contract arrangements – are there specific issues with individual contractual arrangements that give rise to concern?
  • Looking to the future – how might the contractual arrangements need to change if we do have a ‘hard’ Brexit? Short term contracts may be the answer until post-Brexit certainty is achieved or include flexibility to allow the parties to review and update as the consequences become clear.

For current clients of Emms Gilmore Liberson we hope to highlight issues of concern through our news briefings and hopefully this article may prompt you to conduct the reviews suggested.

If you are a potential client we would urge you also to conduct the reviews and can assure you that EGL is well situated to assist with your commercial contracts.

For more information please contact Angela Kerry in our Corporate Commercial team or use the contact form

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