Market uncertainty generated by the UK’s EU referendum result and the lead up to its formal departure from the EU has implications for contracts which may have been entered into on the basis that the UK is, and will remain, a member of the EU.
What will change?
The referendum result and negotiations following the UK’s Article 50 notification are unlikely to provide a basis for suspending or terminating obligations under most commercial contracts. In the absence of specific contractual rights triggered by these events or by market volatility, a party wishing to delay or avoid its obligations because of a change in the economic outlook or regulatory environment will instead have to consider if there are alternative grounds which justify an early end to its contract or which provide a commercial basis for re-negotiation. Close monitoring of the counterparty’s performance of its obligations, any break rights or notice periods could prove crucial.
A party should review its position carefully before attempting to trigger any right of termination. Failure to do so could expose the party to a significant claim in damages. Parties should remember that internal communications (including emails and texts) could form important evidence in the event of a subsequent dispute connected to an attempted termination. Emails and texts may be disclosable to the counterparty no matter how harmful or embarrassing (unless protected by legal privilege). Care should therefore always be taken during any preparatory steps prior to termination.
Should I be worried?
The nature of the UK’s Brexit will not be known for some time. When it comes, with the likely repeal or amendment of the European Communities Act, EU-derived legislation may cease to have effect unless retained or repatriated by an Act of Parliament. As such, the potential exists for a myriad of terms in contracts across different sectors to be directly or indirectly impacted. How may this brave new world affect contract certainty?
Force majeure – many commercial contracts contain a force majeure clause. The purpose is generally to offer a party relief from failures to perform or delay in performing its obligations where it is prevented from doing so by circumstances beyond its control. Their scope varies significantly but some provisions, such as those tied to acts of Government, may allow a party to suspend or delay performance if Brexit results in a particular consequence. Crucially, such clauses usually only provide relief to the extent the force majeure event actually hinders, delays or prevents performance and only for the duration of the event, but the wording of the actual clause will decide when relief is triggered and for how long. In other words, they will not provide blanket-relief for non-performance nor will they usually be triggered simply because performance has become significantly more expensive. Relief will often be tied to a duty to take steps to mitigate the impact of the force majeure.
Hardship/adverse change clauses – some contracts, especially long-term projects, include clauses addressing hardship, material adverse changes or specific change events. These may become relevant following Brexit and allow a party to trigger a right to renegotiate, adjust or even terminate their contract.
Frustration – where the terms of a contract provide no assistance, in extremely limited circumstances the doctrine of frustration may do so. This doctrine provides that a frustrating event may discharge a contract altogether where it is so fundamental that it ‘strikes at the root of the contract’, rendering performance impossible (such as for illegality) or so radically different from what the parties had contemplated. Importantly, in the context of Brexit, frustration will not assist a party whose performance simply becomes significantly more onerous or expensive. For contracts which have yet to be signed, the doctrine will not apply if the frustrating event (Brexit or an event connected to it) is not entirely beyond the contemplation of the parties when they enter into the contract. Taken together, the occasions when the consequences arising from Brexit will give rise to a genuine frustrating event which discharges a contract are likely to be extremely rare.
Eversheds’ expert prediction
The period of uncertainty during the UK’s Brexit negotiations will see an increase in the number of organisations undertaking a careful review of their contracts for a basis on which to delay or renegotiate their obligations, or terminate those contracts altogether. When Brexit occurs, in whatever form that eventually takes, it is possible that this will give parties grounds to trigger force majeure, hardship or change in law provisions in their contracts or projects, allowing for suspension or alteration of their obligations. We expect to see an increase in the number of contractual and termination based disputes.
Parties should undertake a full Brexit risk analysis of existing contracts to ensure that they are ‘Brexit-proof’ before they find themselves in a potential dispute. Forward planning will put a party in the best position to manage or avoid the risks of disputes which may arise as a result of contractual uncertainty and termination.