Do contracts need a ‘Brexit’ clause?

Brexit

By Pete Maguire, commercial solicitor for Wright Hassall LLP

There’s no doubt the word “Brexit” strikes concern in the heart of many UK business owners. It’s not Brexit itself that causes the dread, but the fear of the unknown. There is still no clarity on what Brexit will mean for individuals or business owners.

Although the negotiations have not even started, the prospect of the UK leaving the rest of the EU behind has sent shockwaves, impacting all sectors across the whole business community.

Many companies feel the need for assurance, particularly when looking at future commercial contracts where they need to protect their current interests while ensuring their post-Brexit interests are also secure. This applies in particular in the manufacturing space where importing and exporting are likely to be affected by the UK leaving the single market.

The impact of leaving the single market could be far reaching; currently, over 44 per cent of the UK’s exports go to the EU, so it is understandably an area of concern. In 2015 the UK exported £133billion worth of goods – to maintain this level of export businesses may have to lower prices, which would mean lower profits unless costs can be reduced. Whilst a weaker pound may benefit exports to the wider world in the short term, ongoing uncertainty regarding the UK economy could ultimately negate any exchange rate benefit for exports (and judging by the latest Euro/sterling rates, there is clearly a squeeze on exports to the EU in any event).

On the flip side, businesses that need to import goods or raw materials for manufacturing from the Eurozone are already seeing significant additional costs to purchase the same goods, purely as a result of the drop in the value of the pound.

All of this, of course, could mean that the current commercial contracts many businesses are operating under are no longer viable. Any business that is selling or purchasing from the EU will potentially be affected and should, therefore, consider the impact on the supply chain and their end consumers.

It’s still unclear on where Brexit is likely to hit hardest, but areas, where the ripple effect is likely to be felt, include restrictions on movements of workers, changes in UK law, trade tariffs and the higher cost of capital for SMEs.

The business community is looking for a solution to this where they feel legally protected post-Brexit, with business owners looking at the possibility and legal standpoint of having a “Brexit clause” added to their commercial contracts.

Brexit clauses

A Brexit clause is fundamentally no different to a ‘change’ clause in a contract. Like a change clause, a Brexit-specific clause could be drafted to trigger either automatic changes or a procedure whereby discussions are held with a view to changing the contract, due to a specifically defined (and in this case Brexit related) event. In addition to outlining the specific events that trigger the clause, it should also set out the contractual consequences of that event. In extreme cases, it could be that the consequence is the termination of the contract.

For the clause to be effective and enforceable, it is essential to clearly define the trigger event.

It is important to look at, not only future contracts but also look at current contracts in place that are likely to be affected by Brexit. Businesses should consider seeking to negotiate amendments to terms that are materially affected. It is also worth considering whether the contract contains any contractual remedies that could be triggered by Brexit such as:

Provisions that allow contract renegotiation or termination if; prices change substantially  (including costs relating to tariffs or taxes); the exchange rate fluctuates more than [x] percentage in one or both directions; or the contract becomes unprofitable for one party; force majeure provisions that deal with a change in law, or changes in e.g. regulatory regimes which give rise to additional costs; and an ability to terminate for illegality.

Doing nothing

In some cases commercial contracts may already include clauses that cover “material changes” but there may be a risk in relying on a “force majeure” clause which may not be wide enough to allow a termination based on Brexit because the law doesn’t tend to allow changes in the economic market to be classified as a force majeure event.  Alternatively, you may have the ability to terminate the contract for convenience (or for “no fault”) on a notice period that does not substantially impact your business.

Ultimately, there is no ‘one size fits all’ approach to ensuring contracts are Brexit proof, each contract and solution needs to be tailored for individual businesses. It is worth seeking legal advice or a review of your current commercial contracts to allow an assessment to be made regarding the impact Brexit is likely to have.

enewsletter