Brexit Series Part 3 | Prepare Your Contracts for ‘No Deal’

October 2, 2018

Brexit-Proofing Your Contracts

As another week passes, the politics behind Brexit continues to prevent businesses from receiving certainty as to what their relationship with EU customers and suppliers will be. Following the Labour Party conference in Liverpool and the Conservative Party conference in Birmingham, will we see a continuation of a so-far ineffective and muddled approach or will a clear Brexit vision emerge? What business owners can do themselves is to begin to take some practical measures to make sure that their contracts are in the best possible shape for a ‘No Deal’ or Hard Brexit outcome.

One thing is certain, both the UK and the EU are running out of time to agree an orderly withdrawal and the consequences of a “no deal” outcome will impact the bottom line of businesses. My previous blog article in this series highlighted certain changes to customs systems, processes and procedures if you are a business exporting to or importing goods between the EU and the UK. According to the Chartered Institute of Procurement and Supply (CIPS), it has been reported that there’s a risk of one in 10 British firms going bankrupt due to customs delays.

This blog focuses on the protections available to you in your current English law governed contracts and how you can re-negotiate these to provide you with the ability to take into account negative impacts of a “no-deal” Brexit. This may include an increase in production costs (due to labour shortages or increased tariffs payable due to the UK being considered a “third country”), delays due to increasing customs checks and paperwork, movement in the exchange rate which makes current trading arrangements loss-making or more difficult to perform.

Contract Law and Brexit

The general rule in English law is that the Courts are unlikely to imply terms into a contract in order to protect a party from commercial detriment or economic hardship, Brexit related or otherwise. You are only legally protected to the extent something is agreed in writing with your counterparty, subject to some limited exceptions. Existing provisions in your contracts which may protect against the negative impacts brought by a “no deal” Brexit include “force majeure” clauses (obligations that become impossible to perform, whether actually or legally) and “material adverse change” clauses (fundamental changes to the economic justification for a transaction). However, the fact that a contract becomes loss-making or more difficult to perform is unlikely to be sufficient to terminate or not perform a contract.

How you can mitigate against Brexit

The best way to provide flexibility to parties is to include express provisions to cater for consequences that can be associated with a “no deal” scenario, for example, provisions to pass on cost increases from the imposition of tariffs or provide headroom for delivery. Alternatively, the contract might contain an express right to terminate the contract on Brexit or, instead, expressly state that Brexit does not give the parties a right to terminate the contract. In short, cover the express consequences of Brexit to your business rather than relying on general concepts.

If you are a UK business, identify the key contracts which your business has with EU counterparties. If you are an EU business, identify the key contracts which your business has with UK counterparties.

Review these contracts and assess if they provide sufficient protection against difficulties which may emerge as described above or are at least clear about the implications. Consider whether to try to renegotiate or amend those contracts to deal more clearly with these. If the contract is likely to expire before March 2019, no changes may be necessary, or the expiry date will at least provide the appropriate opportunity for any renegotiation to take place.

Who will take control post Brexit?

Contracts entered into between UK and EU businesses can continue to be governed by the laws of England & Wales. The English judiciary has a well-established tradition of political independence and expertise which allows contractual parties certainty in the application of legal principles and speedy outcomes. From a legal viewpoint, English contract law is largely unaffected by Brexit. If UK and EU based businesses choose the governing law of their contracts as English law and the jurisdiction of the Courts of England & Wales, the English courts will generally accept jurisdiction on the basis of the parties’ choice under English common law.

Next week will be Part 4 to complete this current series on Brexit’s impact for businesses.

LawBite is helping small and medium-sized businesses understand the risks and develop strategies for Brexit. You can contact the author of this article, expert LawBrief Raza Naqvi, for further legal advice, or please do enter an enquiry for a free 15-minute legal consultation. Alternatively our friendly Client Care Team today are ready to help you with your business legal advice issue on 020 7148 1066.

Journey further
Brexit Impact series  Part 1 | Timeline, What Next?
Brexit Impact series Part 2 | SME advice
Q4 Planning – Key Considerations For Your Business Contracts