Brexit and commercial contracts - the legal implications
The uncertainty and volatility following the Brexit vote raises strategic challenges for every business, and commercial directors in particular. Having already explored the 5 questions business leaders should ask at their next board meeting, Thrings now examines key considerations for commercial directors in the post-Brexit era.
How does Brexit affect our existing contracts?
Review your existing commercial long-term contracts that may be in existence when the UK formally leaves the EU. Assess your contractual links to the EU, identify any issues that could arise, and take appropriate action. Each contract is different – there is no one-size-fits-all approach – but the following key issues should be considered:
Territory: Many contracts contain specific territorial provisions, and uncertainty may arise where provisions refer to the EU. The UK’s position will need to be considered and agreed ahead of Brexit. Each contract may be constructed differently, and all parties should look to clarify the position quickly.
Pricing: Given sterling’s recent volatility, exchange rate changes could seriously impact your costs. The agreed pricing mechanisms may now be too costly, particularly if margins were already tight. Consider whether stated prices are inclusive of duty. Knowing your position (in terms of negotiating new prices, enforcing any Brexit-related clauses or even terminating the agreement entirely) is key.
Termination: The impact of Brexit may prevent you from performing your obligations under the contract, or force majeure or material adverse change provisions could be triggered at the time of Brexit (or possibly before).
In light of your analysis of these key issues, consider whether any existing contracts could or should be renegotiated or terminated to protect the business.
In light of Brexit, how should we approach future contracts?
When negotiating the terms of a new long-term contract, consider how it might be affected by the UK's departure from the EU, and make the necessary provisions in the contract. Options might include:
- Either expressly including or excluding the UK leaving the EU (or serving notice to leave the EU) in or from any force majeure or material adverse change provision;
- Giving the parties termination rights when the UK leaves the EU (depending potentially on the terms Brexit ultimately takes);
- Suppliers should consider providing for, or referring to, an alternative pricing mechanism which will apply once the UK leaves the EU and new tariffs and changes to cross-border taxes are known. These will help insulate your business from unacceptable risk exposure.
What changes should we make now?
Communicate: Start discussions with suppliers and customers about Brexit, any potential challenges and possible solutions. Keep written records of any discussions and agreements reached.
Take stock: Revisit your standard form contracts to ensure these are suitable for the post-Brexit landscape. Most importantly, review the price variation, force majeure and termination provisions.
Renegotiate: Some contracts may be dependent on the ongoing operation of particular EU legislation (e.g. the free movement of goods). On the UK giving notice to leave the EU, it is possible the contract could be incapable of performance, force majeure provisions could be triggered or the contract may no longer be profitable. Consider whether existing long-term contracts should be amended and whether new contracts should build in protections to preserve the commercial purpose. If this is not possible, consider whether you are able lawfully to suspend performance or terminate the agreement. This may lead to dispute, so take appropriate advice first.
Risk assessment: How will your customers and suppliers be viewing your existing contracts with them? Which contracts are at risk of suspension or termination? If a contract is no longer profitable or becomes incapable of performance, the counter-party may consider its rights to terminate.
Customer and supplier safety: Consider the impact of the ongoing uncertainty on your key customers or suppliers. Ensure you are making contingency plans for key suppliers or customers going out of business. Also review your current contracts – what are the rights to terminate for insolvency? Do you have a parent company guarantee in place?