Member Article

What will Brexit mean for your commercial contracts?

As the dust continues to settle following the UK’s historic Brexit vote, FDR Law’s Commercial Partner John King, considers how commercial contracts could be affected by Brexit…

The Prime Minister announced during the October 2016 Conservative Conference that the UK would begin the formal Brexit negotiation process by the end of March 2017, and that the UK will formally leave the EU in the first quarter of 2019. For the time being, EU law continues to apply until the exit negotiations are finalised and it has been suggested that the task of reviewing and, where appropriate, repealing or amending legislation could take up to 10 years.

Both in the run up to and following Brexit, Britain will clearly continue to do business with the rest of the world, so it is important to understand what ‘rules’ are likely to apply to commercial contracts which underpin their business relationships, particularly with EU companies. So to what extent will developments during the negotiation period affect some of the commercial and legal areas?

On the face of it, many commercial contracts would seem to be neutral as to whether the UK left or remained in the EU. They are generally less heavily regulated than many other areas of law, and, as the name suggests, tend to be based on the commercial bargain between the parties. But what if that commercial bargain is in itself significantly affected by Brexit? Now is a good time to start identifying any potential risk areas in your commercial contracts. These could include increased trade barriers, currency fluctuations, the territorial scope of your agreements, and changes in law.

Existing contracts

The UK leaving the EU may well affect the operation of existing contracts, possibly in a manner that the parties had not foreseen or planned for at the time of entering into the contract. For example, if the operation of the contract was wholly or largely dependent on the ongoing operation of some particular EU legislation it is possible that the contract could be frustrated (i.e. terminated) or the force majeure provisions could be triggered at the time of Brexit (or indeed possibly before when the terms of Brexit become clearer).

Short term contracts

Short term contracts are less likely to be affected by the UK leaving the EU due to the two year negotiating window that will start once Article 50 is invoked. This negotiating period should give both parties time to consider how the terms of Brexit might affect their longer term contractual arrangements and give rise to re-negotiation.

New contracts

Before entering into any new contracts with corporates in other EU Member States, careful consideration should be given to these areas if the contract is likely to continue post Brexit, and you should seek to provide provisions in the contract that might include:

• Either expressly including or excluding the UK leaving the EU in or from any force majeure provision

• Giving the parties termination rights when the UK leaves the EU

• Providing for/referring to an alternative mechanism which will apply once the UK leaves the EU

Overseas contracts

The greatest economic impact is being felt by businesses bringing in materials from abroad. Materials and fuels brought in by UK manufacturers rose 7.6% over the last month; the fastest rise since December 2011.

The expectation is that in the event that Brexit means that the UK ends up trading with Europe under WTO (World Trade Organisation) rules, anticipated EU import tariffs would add approximately 10% to the price of UK goods sold to the EU. Any party to a contract that is no longer economically viable will need to review their contractual (and common law) termination rights to see how quickly they can bring the contract to an end or whether the contract offers opportunities to re-negotiation the commercial terms.

In these circumstances force majeure and material adverse change provisions are relevant. Whether they are triggered will depend on the exact drafting of the contract and the application of the rules of contract interpretation. Currently, the market consensus seems to be that it is relatively unlikely that force majeure clauses will be triggered in the absence of wording specifically contemplating Brexit. It may be easier to argue that financial consequences following on from Brexit constitutes a material adverse change but not every contract includes a material adverse change provision.

Next steps

If any of your key contracts are likely to be affected by Brexit, you could consider seeking to negotiate amendments to terms that are materially affected. It is also worth considering whether the contract contains any contractual remedies that could be triggered by Brexit.

Trade deals with the remaining EU states are highly likely to take several years longer than that. In the meantime, the ramifications of Brexit will hopefully become clearer so that businesses are able to confidently deal with any contractual issues that it may bring.

How can we help?

FDR Law’s experienced team of commercial lawyers can assist you with reviewing your existing contracts to see how robust they will be in the light of the potential impending changes; drafting the necessary documentation to give effect to any contract variations if they are necessary or advisable and ensuring that any new contracts are prepared with the upcoming changes in mind. If you would like to discuss this further, please get in touch with John King, Partner at FDR Law, on Tel: 01925 230000

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