Brexit: are EU ready?

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22 February, 2019

After events on the 14th February the UK became the closest it has even been to a no deal Brexit. With further talks scheduled with EU leaders over the next few weeks, the future of the UK is uncertain. But what does this mean for business owners in a legal context and how should they prepare in light of the UK's departure on the 29th March 2019?

There is no on-size-fits-all approach when it comes to assessing the commercial implications of Brexit, the impacts depends on the particular circumstances of each business and its future business plans.

For existing contracts, the main points to consider are whether the contract in question will remain in force beyond the 19th March 2019 and whether the nature of the contract means that it crosses the EU-UK border in some way. Businesses who satisfy this threshold and are concerned about Brexit should consider expressly providing for a situation where they are no longer able to perform their contract or where the costs of contractual performance are radically altered.

Subsequent risks include the imposition of tariffs on trade, restrictions on the movement of people, fluctuating exchange rates and licensing and professional qualification certificates becoming unenforceable. Who will cover the price of the tariffs if they increase? Will tariffs at the border delay the exportation or importation of goods or raw materials? What currency payments are stipulated under the contract and how do they deal with significant alterations in exchange rates? If a professional qualification certificate is unenforceable will they still be able to perform these services outside the UK? Additionally, suppliers of services and goods should consider this in context of their supply chain overall and not just their individual contracts.

Failure to factor these issues in the contract means that a party will be obliged to continue to fulfil its contractual obligations, even if Brexit has later rendered that contract commercially unattractive. If a business cannot negotiate the contract in light of post-Brexit changes, then it may find itself in breach of the contract and contractually liable to the other party. Businesses should consider whether they wish to incorporate a Brexit clause into a contract, which would govern what should happen if the legal and business environment is altered by Brexit the future.

Businesses may opt to introduce negotiation clauses which compel the parties to renegotiate the terms of the contract in particular circumstances. This may accompany a termination clause whereby either party may terminate the contract if a successful re-negotiation cannot be reached. Alternatively the parties may specify the consequences of certain events, such as adjusting the price of products in the event of fluctuating currency rates. Either party may also opt to introduce a hardship clause which specifies who bears particular contractual obligations, for example stating that the supplier will bear the cost of any increased importation charges.

The significant of force majeure clauses have also been question in anticipation of Brexit. The consensus is that a force majeure clause is unlikely to be a satisfactory substitute for a Brexit clause. This is because Brexit is not an 'unpredictable event' as such, in most cases Brexit was anticipated when the contract was entered into and the parties should have planned to their effects accordingly. The same principle applies to the common law doctrine of frustration, where in most circumstances the inconvenience of the contract becoming unfavourable is unlikely to amount to a force majeure event or frustration in its own right. Parties should therefore assess whether Brexit would fit into the definition of Force Majeure within their contract if this is what they intend to rely upon.

The approach taken by each business depends on whether or not they are confident in their ability to deal with the contract in question post Brexit. In light of the current chaos short-term contracts may choose to revise their terms to address the impact of Brexit as and when it happens. Other contracts may have already incorporated a termination clause which can be enforced on short notice, meaning a Brexit clause might not be necessary at all. Other parties may wish to do nothing at all. Regardless of the approach Brexit seems to be coming in one form or another... are EU ready?

Forbes regularly advises on all aspects of commercial law and contracts. Contact us at John Pickervance, or 03332071134 to discuss any issues further.

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