Clauses, Contracts and Conventions

In our overview post on eWorld last week, we promised you the key takeaways from law firm CMS on Brexit, contract clauses and the supply chain. Partner Sam de Silva, adviser on the negotiation and drafting of complex commercial agreements and specialising in strategic IT and telecommunications, gave a 40-minute explanation (free advice basically) of what happens to existing cross-border contracts if the UK leaves the EU without a deal.

Unsurprisingly this was a well attended session, despite being the last of the day.

He talked about whether a Brexit clause would be worthwhile, and what would it achieve?  An ‘if/then’ clause is subject to impact, and we still don’t know what the impact might be. Although it may be possible to specify certain consequences of some events, it’s difficult to specify all of them. And the parties may well attempt to renegotiate aspects of the contact, for example, feeling it is economically or logistically impossible to continue post Brexit, maybe due to extra costs and constraints that weren’t predicted when the contract was first negotiated. So basically, including a clause isn’t the ‘silver bullet’ to solve your Brexit problems. (That’s not to say you shouldn’t have standard provisions too, like force majeure, he emphasised.)

But a very good piece of advice was not to forget that Brexit is not a temporary situation, so whatever requirement or impact you decide to include as a Brexit clause (if you do) is not something that you can then renegotiate (you could try to pin it on Brexit as a force majeure (he said tongue in cheek), but most suppliers won’t go for that! And neither will the courts – see later.

He specified two types of Brexit clause that should be considered in commercial contracts if you are thinking about that:

  • A specified event and specific consequence: this might be currency and exchange rate variations leading to product or service adjustments. But it’s hard to name them all.
  • A ‘trigger’: that could be an imposition of tariffs or change in regulatory requirements or a party’s costs increasing, leading to renegotiation. But it’s not a given that an agreement can be reached, leading to one party having to accept less favourable terms or early termination.

He advised what to consider when deciding whether to include a Brexit clause:

What could happen? How might Brexit affect the parties’ performance and cost?

What does the contract currently say? Who would bear the additional responsibilities and costs as the contract is currently drafted? Who is responsible for compliance with the law?

Could a force majeure or MAC (material adverse change) or price adjustment or change control clause be invoked? And would it be possible to argue ‘frustration’ – where subsequent to formation, and without fault of either party, something is incapable of being performed due to an unforeseen event.

How do the termination rights operate? Could the prospect of termination be used to encourage renegotiation?

Are there any specific events for which the parties feel confident about providing consequences?

Is it in any party’s interest to include a clause on allowing renegotiation or termination for certain triggers?

And possible effects to be thinking about:

Impacts on own ability to use products or services purchased under agreement, or on customer’s ability to use or sell your products

Trade tariffs

Freedom to provide services and of worker movement

Licences and consents

Changes in law and currency and exchange rates

Will the UK shrink? (Scotland, Wales, N Ireland?) and When will the UK be considered separate from  the EU?

Using Brexit as a ‘get out clause’ or reason for termination or inability to comply, won’t necessarily be a consideration of the courts: they won’t get involved he says, if you have ability to renegotiate. He cites a recent case concerning Canary Wharf and The European Medicines Agency. EMA wanted to get out of its lease owing to Brexit possibly causing higher lease prices. But it was ruled that it cannot use the UK’s upcoming exit from the EU to ‘frustrate’ its multi-million pound lease.

Frustration’ explains CMS, “arises when an intervening event or change in circumstances is so fundamental in nature that it renders performance of a contract “radically different” and therefore discharges parties from future performance of their obligations under the agreement. The EMA submitted two arguments that Brexit would frustrate the Lease.”

This decision has therefore not opened the floodgates for frustration claims from tenants seeking to exit their leases in the wake of Brexit, it says. It is likely that parties will be held to their contracts even if Brexit makes contracts more expensive or onerous.” Read that full story here.

Suffice to say, it’s a complicated business, so obviously, for proper advice, talk to legal.

 

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