The B-word should already be high on the agenda of businesses trading within the EU or relying on EU-based supply-chains.
If the pound strengthens or plummets around Brexit, would you still be able to uphold the prices agreed in your contracts? Could delays at border-control prevent you from meeting agreed deadlines and targets? Are you part of a supply-chain that relies on goods/services being supplied restriction-free from an EU member state?
The first and most important thing to highlight is that sadly we do not own any form of Brexit crystal ball. The UK could leave with no agreement in October or it may take several years of transitional arrangements and negotiation to fully leave the EU, if we ever do…
Ultimately this means that we do not know how far Brexit will ripple through our economy or indeed when such effects will manifest themselves. We cannot therefore draft contracts in such a way that they would be “Brexit-proof”. What we can do is negotiate wording that creates some contractual certainty upon which unforeseeable, Brexit-related issues can be resolved.
Catch-22
Some of the potential adverse consequences of Brexit:
- currency fluctuations;
- the imposition of tariffs on previously unrestricted trade;
- new licensing requirements to transport goods or provide services in the EU;
- delays at harbours/border-crossings; or
- changes in law.
Any of these consequences could result in a party to a contract being:
- unable to perform their obligations under the contract; or
- worse still, able to perform the contract but doing so would be economically unviable.
Economic hardship does not generally excuse a party from their obligations under a contract and they could be sued for not complying with these obligations. This could result in a party being stranded in a catch-22 situation whereby compliance would be loss-making and non-compliance could invite litigation.
So how would a “Brexit clause” operate?
A so-called “Brexit clause” could allow the parties to renegotiate terms of the contract in the event that Brexit has a significant adverse impact on the contract. If the parties cannot agree amended terms they can terminate the contract and walk away from each other.
To illustrate:
- company A in the UK contracts to supply raw material X to company B in France;
- under EU rules, no tariffs apply to transporting X to company B because both companies are within the EU;
- post-Brexit a tariff of 50% is now payable on X entering the EU market;
- company A’s profit margin was only 25% under the contract so to complete their obligations they would be losing money, yet to cease supplying X, company A would be in breach of contract;
- company A serves a “Brexit notice” on company B seeking to renegotiate the price under the contract;
- both parties have, for example, 14 days to renegotiate a new price that both parties are happy with;
- if they agree a new price, the amendment is formally signed and the contract remains in place; or
- if company B is unwilling to pay a sufficiently inflated fee and they cannot agree a new price, company A can serve a “Brexit termination notice” on company B and after, for example, 30 days the contract will come to an end and the two companies walk away from each other.
Learning points
- No excuse. Unfavourable economic conditions will not excuse a party from performing a contract simply because it is unprofitable to do so.
- Notice periods are key. If you are aware of a negative impact that Brexit is likely to have on your sector or a specific contract you are party to, it is vital that you understand your legal position and whether you can get out of your contracts at short notice.
- Speak to your lawyer. We can act as a sounding board for your concerns and figure out ways around them.
Our professional and experienced Commercial Team deals with these queries on a daily basis. We are always happy to speak with you and discuss the options available to protect your business against the uncertainty of Brexit.
Should you have any immediate questions, please contact Roger Margand, Partner, Head of Corporate & Commercial.
