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Brexit and your business contracts

5th December 2018

Brexit and your business contracts

5th December 2018

It is the million £ question… how will Brexit impact businesses?

Well, in my opinion, this is the wrong question. A better question is “what can I do to protect my business, whatever Brexit may bring?”

Before you shout “scaremongerer” at your screen – I know that the world will not cave after 29th March 2019 …

But, uncertainty is a certainty for the next few months. If Brexit does affect the ability to perform or pay for our contracts, surely businesses want to be ready.

Here’s an example:

A local farmer sells wheat to a bread producer in France, the contract will outlive Brexit. Brexit becomes a no-deal situation and on 30th March 2019, trade with the EU switches to World Trade Organization terms which has the potential to raise tariffs and imposes customs checks.

There will be an obligation for the farmer to continue to supply France, even if it is now commercially unattractive for them given the rising tariffs (should the seller be burdened in this regard) and delays/costs arising from the customs checks. If the farmer is unable to renegotiate his contract, he may find himself in breach of contract and facing an action for damages.

What can I do?

 You have a few options:

  1. Do nothing. If you have concluded that there is a low risk of non-performance of your obligations,  you may not need to negotiate an exit strategy. But at least you have reviewed your contract being mindful of the potential impact.
  2. Consider whether a short-term contract is more appropriate for the time being. This allows you to address Brexit impact as it happens;
  3. Check if you have a right to terminate at short notice without incurring a penalty; or
  4. Use contract clauses (sometime called Brexit clauses *roll of the eyes*) which can allow for renegotiation and, in the event of no agreement, termination where:
    1. a specific event occurs, or consequence arises such as a price rise or exchange rate crash; or
    2. there is a trigger such as the imposition of tariffs/duties.

It is also important to look at the whole business picture. For example, our farmer may buy fertiliser from a supplier in the EU or he may rely on migrant workers to operate the business.

 

What should I NOT do?

Rely Force Majeure

These are common as a mechanism to terminate a contract in the event of something “outside the control of a party” but only if the party has taken all reasonable steps to avoid or mitigate the effects.

Let’s face it, we’ve known about Brexit for a while now. I don’t think we can argue that there hasn’t been enough time to prepare for the effects. It’s also generally accepted that a changing economy or market should not be considered an FM event.

 

Rely on Contract Frustration?

For a contract to be frustrated, the event cannot be reasonably contemplated by the parties upon contract formation. As with my comment on Force Majeure above, we’ve known about Brexit for a while now – any argument in this regard will be entirely circumstantial.

 

Rely on performance being impossible, illegal or radically different?

This is a very high standard reserved for the gravest of matters … for example, a successful case for illegality was to prevent “trading with the enemy” during WW2 and the impossibility standard was met only when an entire factory had burned down. Brexit may not cut the mustard.