Making your contracts Brexit-proof

Making your contracts Brexit-proof

There are still many uncertainties since the Brexit referendum result. Although Article 50 was triggered in March 2017, the UK will not formally leave the EU until March 2019 at the very earliest. Until this time, it is “business as usual” for UK companies and EU rules and regulations must continue to be abided by.

We cannot know for certain at this stage what a post-Brexit UK will look like but businesses that trade with the EU, or are exposed to EU markets, should start thinking about possible eventualities. In particular, whether contracts with EU trading partners will continue to be commercially viable if there is regulatory change or if the UK does not remain part of the single market and tariffs are imposed and/or currency fluctuations worsen.

Whilst Brexit uncertainty remains, businesses should be considering whether they need any specific contractual Brexit protections before signing any long-term agreements. For example:

  • a right to terminate the agreement if there is a change in law following Brexit that has an adverse effect on one or both parties;
  • a price adjustment mechanism to deal with the risk of currency fluctuations; and/or
  • an obligation on the parties to meet and renegotiate terms when the Brexit deal is finalised, with defined consequences (e.g. a right to terminate) if new terms cannot be agreed.

Conversely, if the other party to such an agreement asks for contractual protections of this nature, you will need to consider whether such clauses are commercially acceptable to your business or whether they need to be softened to ensure that any termination or other rights granted are not unreasonably broad.

If the parties agree to include such “Brexit clauses” in an agreement, it will be necessary to clearly define what “Brexit” actually means and whether any termination or other rights should trigger if there is a “soft Brexit” as opposed to a “hard Brexit”.

Although it is already commonplace to see “force majeure” clauses in contracts (that is, a clause allowing a party to suspend or terminate the performance of its obligations when certain circumstances beyond their control arise, making performance of an obligation impractical or impossible), it is unlikely that any consequences of Brexit would amount to a force majeure as under English law changes in economic or market circumstances that affect the profitability of a contract are rarely caught by such a provision. In any event most force majeure clauses require the event to be unforeseeable but Brexit by its very nature will be considered a foreseeable event in most new contracts.

There is no one size fits all solution to Brexit-proofing a commercial agreement and the nature and extent of the contractual protection required will need to be tailored to your particular business.

If you would like to discuss any issues relating to contracts in the light of Brexit, please do not hesitate to contact us.