Following the prime minister’s Lancaster House speech on 17 January 2017 in relation to Brexit, we now have a better understanding of the government’s priorities and objectives, and that all-important question as to whether parliament must vote before Article 50 is triggered, has now been answered.
There has been a lot of coverage recently about the impact that Brexit may have on contractual relationships in the UK. Such coverage has highlighted areas including:
- financial hardship resulting from increased costs and further fluctuations in exchange rates;
- the possibility that tariffs and duties will, in the future, apply to trade with the remaining EU member states;
- contractual uncertainty where contracts were negotiated and drafted on the basis that the UK was an EU member state. For example, where the territorial scope of an ongoing agreement is the EU, does that mean that the UK falls outside the contract’s scope after Brexit?
In light of the uncertainty and potential negative effects that Brexit may have, it is almost certain that disagreements will arise regarding how these issues are dealt with and which party should bear any additional costs and/or risks but perhaps more importantly, whether the contract actually remains viable.
Businesses continue to consider what can be done to “Brexit-proof” existing and future contracts. It is certainly possible to build into contracts provisions to mitigate the risks associated with Brexit where those risks can be identified; however, the real challenge will be dealing with those risks yet to be identified.
Some examples of clauses which you may seek to include in future contracts include:
- when Brexit occurs, a clause which gives you a specific right to terminate;
- if, following Brexit, a contract becomes uneconomic, renewable rather than fixed term provisions to be included, which give you the scope to walk away;
- adopting more sophisticated pricing mechanisms which expressly allow adjustments on the occurrence of one or more pre-defined events;
- force majeure provisions that either specifically includes or exclude Brexit related events;
- material adverse change provisions which deal with the possibility that Brexit may result in a contract becoming unprofitable or unduly risky;
- if a contract is to include a definition of “Territory” like the EU, wording that clarifies how the term is to be interpreted post-Brexit (i.e. will it include or exclude the UK?).
If on review, you consider you have the commercial leverage or contractual right to re-negotiate existing contracts to include some of the clauses mentioned above, it would be worth considering.
As you will no doubt appreciate, different contracts will be affected in different ways and to different extents by Brexit. In this article, we have only looked at some of the general issues that may arise.