BREXIT – CONTRACTS AND PERFORMANCE NOW WE ARE ACTUALLY OUT
As the dust settles and we all come to terms with being out of the EU, it seems a real possibility that the implications of Brexit may give rise to contract disputes. Particular areas could be in relation to issues such as price, distribution of goods, plus any future changes in EU standards which may then not apply to the UK.
In essence, contract disputes tend to arise where one party to the contract may find themselves in some generic situations, which we have set out below with our thoughts and some more general contract breach guidance.
- The contract is impossible to perform?
In the situation that Brexit effectively makes a contract impossible to perform, it may be possible for a party wishing to terminate it to rely on a ‘Force Majeure’ clause, or to argue that the contract has been frustrated.
Throughout the pandemic in 2020 and now into this new year, many contracts have come under pressure and parties have had to consider whether their obligations have been suspended by Force Majeure. It is important to note at the outset that there is no general doctrine of force majeure recognised in English law; it is a matter of contract. Whether or not a matter (including for example, the COVID-19 outbreak), constitutes a force majeure event, , will depend on the provisions of the contract and their interpretation. Questions to ask would be:
- Is a force majeure clause included in the contract i.e. are there provisions that: anticipate an event beyond the parties’ control that may affect performance of contractual obligations and seek to relieve one or both parties from so performing the same?
- Is there a definition of force majeure? Is it defined in broad terms OR defined by reference to an exhaustive list of specified?
- Does any definition of force majeure exclude foreseeable events? It could be argued that at the time the contract was made, the events unfolding around the world and highly prominent media reporting made the event foreseeable, for example.
Remember, In relation to Brexit (or indeed COVID-19), just because a parties’ situation has become “economically more burdensome”, this will not in itself result in being able to successfully invoke a force majeure clause.
The common law doctrine of frustration may apply, if, as a result of the coronavirus pandemic, performance of the contract has become legally or physically impossible through no fault of the parties. It is, however, a relatively high threshold and unusual for a contract to be frustrated; and frustration will not apply where:
- a valid contract term deals with the situation arising; or
- the parties foresaw, or should have foreseen, the frustrating event, when they entered into the contract.
Whether a party can be released from their obligations will again largely depend on specific wording and the individual circumstances. For example, in the 2019 Brexit-related case of Canary Wharf v European Medicines Agency (EMA) a lease of an office in Canary Wharf was not allowed to be cut short when EMA relocated to Amsterdam as a consequence of the UK referendum decision to leave the EU. Its lease had commenced in 2019 and was not due to end until 2039. The court held that Brexit had not made the tenant’s occupation impossible if they could still sublet. As performance of the contract was still possible, no force majeure or frustrating event had occurred. Eventually, EMA settled the dispute by subletting the space, but remained liable under the lease to Canary Wharf for the remainder of the lease term.
- How about where a contract is now illegal?
At present, the UK is transitioning out of the EU broadly with largely the same baseline standards relating to the production of goods as currently in place. However, the future remains an uncertain place and the EU could enhance or introduce further measures that do not apply in the UK. If a UK product that is the subject of a contract therefore falls short of measures in the EU in future, it may become illegal to export it to the EU.
As a general principle, where a contract becomes illegal to perform under foreign law, a contract governed by English law will not be frustrated if the place of performance is an English jurisdiction. For example, in the previously mentioned Canary Wharf case, the performance of the contract was to take place in England, and the tenants were therefore not able to argue that the contract was illegal.
If English law makes the contract illegal to perform, it is highly likely that a court would find that the parties are relieved from their obligations. On the other hand, if a contract is to be performed in the EU, and a new EU law makes that performance illegal, an English court may find that the contract is unenforceable as it would be prohibited in the place of performance. The key warning here though is that depending on the circumstances, if goods produced in the UK subsequently fall short of EU standards and it is possible for those goods to be amended so as to comply with any new EU standards, performance is unlikely to be regarded as impossible or illegal.
- What about changes in tariffs/cost etc?
The situation could arise where contracts negotiated pre-Brexit that were previously of high value to the parties become much less profitable to one party due to a cross-border element being introduced between the UK and the EU. Examples of this could be increased distribution costs, changes in exchange rates, tariffs being introduced on certain goods or problems with speed of delivery.
The starting point here is that a party is entitled to terminate the contract will depend on the specific wording and whether the specific scenario is envisaged as an event allowing termination. This can be via a Force Majeure clause, but there may be other clauses that you may be able to negotiate, or if in existence, rely upon. For instance, some contracts provide that the parties may renegotiate if a change in law or economic circumstances mean that a party is financially disadvantaged.
It is also worth chewing over whether the law of the contract offers any assistance. In Spain, for example, if contractual performance becomes excessively onerous as a result of an unforeseen event, the affected party may request a renegotiation. If, subsequently, renegotiations fail, this can lead to termination by agreement or intervention of courts in some cases.
In simple terms, it is always open to parties to agree variations to existing contracts. If parties do agree to renegotiate their contract terms, even temporarily, they should of course comply with the contract’s requirements, such as recording any variation in writing.
Some other practical issues to consider for variations include:
- The long-term impact of any agreed changes for the immediate situation. Should the agreed changes apply only for a limited period?
- Knock-on effects of the changes on related contracts. For example, should the changes be reflected elsewhere in the contract chain (down, to subcontractors and suppliers or up, to funders and customers), and will the changes affect the enforceability of any existing security arrangements, such as bonds and parent company guarantees?
- Knock-on effects of the changes on other terms of the contract. For example, the payment mechanism, insurance provisions, and termination provisions.
- What about EU provisions in the contract?
As a rule, English courts have taken a fairly strict approach to contractual interpretation by looking at the express wording of the contract. This means that if a contract refers to an EU law, an English Court may well apply that EU law, rather than reading it as a reference to an equivalent English law. However, the court will consider the purpose of the clause or other provisions of the contract if they indicate that that the parties intended something different. For now though, the general approach is to keep existing domestic legislation that derives from EU rules in place. In particular, the European Union (Withdrawal Agreement) Act 2020 has the effect of transposing current EU legislation into domestic legislation.
- What about the territory being referred to as “the EU” in the contract- does this now include the UK?
If a company distributes goods within the EU including the UK pre formal Brexit under a contract that provides that it has the right to distribute “within the EU”, post-Brexit, does that party lose the right to distribute goods in the UK? The Court in a dispute will consider the contract as a whole and will construe its meaning, including whether the provisions refer to the EU as at the time the contract was signed (i.e. including the UK) or as formed from time to time (i.e. not including the UK, after Brexit) but this may not be immediately obvious from the face of the contract. Much may depend on context. A contract signed on the cusp of Brexit might be assumed to have taken into account that the EU would not include the UK for much longer, whereas a long standing contract entered into before Brexit was even contemplated, are more likely to include the UK for all purposes.
The bottom line here and now still appears to be that whether or not you are entitled to terminate a contract due to the implications of Brexit will depend on your individual circumstances, and the specific wording of the contract in question.
Our top tips when looking to terminate would be:
- If a term is particularly important, make sure that you agree expressly that it will be a strict condition of the contract so that any breach will allow termination;
- Take early proper legal advice and get the contract right before it is agreed with a view to the above and your risk appetite; if you get it wrong, you may find you are in breach and the counterparty is entitled to terminate and claim damages;
- If you agree time is “of the essence”, even a short delay could mean the counterparty can terminate and claim damages;
- If considering termination, please do not do anything that might demonstrate an intention to go on with the contract; you may lose the right to terminate; and
- Remember that you may not be able to exercise a right to terminate a supply contract if your customer has entered into an insolvency process.
Please drop us an e mail or call if you need any further details or assistance with any contract review and stay safe and well.