Brexit-related uncertainty, and the UK's unstable government, raise questions about supplier contracts
Uncertainty and cross-border supplier contracts don’t go well together. The Brexit negotiations were always going to create masses of this uncertainty. Add to this a hung parliament and the immediate future looks like the most white-knuckle of rollercoaster rides.
Contracts that span the likely Brexit date should be reviewed even though we won’t know for some time whether there’ll be a transitional period, if the UK will leave the Customs Union or what the trading arrangements will be.
The risk for suppliers and customers alike is that they are contractually obliged to stick with the terms of their bargain even if Brexit-related developments make them commercially unviable because of:
- Exchange rate fluctuations
- Inability to adjust the price of products
- Imposition of EU tariffs
- Changes in existing regulatory requirements
The limitations of “Force Majeure”
Most contracts include provisions to cover future events that may affect performance, so-called events of “Force Majeure”. But this is not a recognised legal concept under English law – so the wording of the relevant clause will be crucial.
In our view, unless express reference is made to Brexit in the Force Majeure clause, then it is unlikely to assist, because the usual drafting refers to the occurrence of events outside the reasonable control of a party. Unless the contract pre-dates the referendum, then it may well be argued that parties could and should have planned for its effects.
If “Force Majeure” doesn’t offer relief then is there a material adverse change or a hardship clause? A change in circumstances that adversely affects the profitability of the contract, from that expected when the contract was entered into, does not excuse performance or in itself give any right to alter the contract.
In some agreements, one or both parties may have the right to terminate on relatively short notice for “no cause” or “convenience”. The existence of such a provision may mitigate the need for a specific Brexit clause, and it may be worth inserting such a clause in new contracts – but expect resistance depending on the context.
Don’t mention the war
Where there are no specific provisions in the contract, some might be tempted to look to the common law for assistance. The doctrine of frustration, where performance of the contract becomes impossible or illegal, became highly developed to cope with inter-state trade, including between the belligerents, during the hostilities of the First World War. However, the courts are reluctant to apply the doctrine and it might also be said that if Brexit was predictable at the time of contract formation, then it should have been dealt with in the contract.
Time to act
A year on from the referendum result, and more than three months from the triggering of Article 50, there is an almost unbelievable air of “keep calm and carry on” in some boardrooms. Existing contracts which will endure beyond 2019 must be reviewed urgently. Contracts currently under negotiation and that are intended to endure beyond Brexit must also take that into account.
Where appropriate clauses are present, should they be used as a trigger for termination or renegotiation? Suppliers need to consider not just those events which may directly impact on them and their performance, but also anything which may affect their supply chain. Considerations for customers may include their own ability to use the goods they are obliged to purchase under an agreement, and the ways in which the market for their own products may be impacted. With many sectors tightly regulated under the provisions of EU law, those trading across the EU will find these considerations of considerable importance.
Bill Gornall-King is commercial and technology partner at Boyes Turner