The Impact of Brexit on Commercial Contracts
31 October 2016
It is clear that whatever form Brexit takes, it is likely to have a disruptive influence on many commercial contracts, due to its potential to affect the commercial bargain underlying those contracts.
It is critical to consider how Brexit could affect your business in a climate of unprecedented uncertainty. Unfortunately there is no "one-size-fits-all" approach. We suggest that you review your existing contracts and trading relationships in light of your particular industry or sector to identify the risks that Brexit may pose.
When reviewing your existing contracts (or negotiating new contracts) we suggest you consider the following matters -
Do your existing prices or pricing mechanism assume zero tariffs or the free movement of goods and people? Import tariffs and VAT increases could render profitable contracts loss-making. Consider seeking to re-negotiate prices or pricing mechanisms or ensure you have appropriate termination rights.
Exchange rate volatility is likely to continue. Consider including currency fluctuation provisions to allow parties to switch currencies, re-negotiate prices or terminate the contract, in response to market conditions.
Term and termination rights
Check what rights you have to terminate the contract, in particular whether there are any termination for convenience rights. With new contracts, you may wish to consider negotiating shorter terms, until the impact of Brexit is better understood.
Force majeure and MAC clauses
Force majeure and MAC clauses are unlikely to be triggered by Brexit but this will depend on exactly how they are worded. If Brexit may impact on your ability to comply with performance obligations you may wish to negotiate a specific "Brexit clause" to give relief in the event that Brexit delays or prevents contract performance.
Change in law
Check whether your existing contracts address who will bear the cost and risk of a change in law that materially affects the contract. Consider including a clause to address this in all new contracts.
References to EU law
Are there any obligations in your contracts that are defined by reference to EU legislation? If so, consider whether this should continue post-Brexit or whether the references should be amended to refer to UK national laws instead.
Consider the impact of boilerplate interpretation provisions on repealed or amended laws and regulations.
If you are contractually required to maintain certain regulatory approvals, you should consider what will happen if Brexit results in such approvals being delayed or more difficult to obtain. You may wish to negotiate relief in the event that you are delayed or prevented from obtaining such regulatory approval as a result of Brexit.
You should identify the territorial scope of all existing contracts. If the territorial scope is the EU, it will obviously need to be amended to refer to the EU and the UK post-Brexit.
International trading standards
When negotiating new contracts, consider referring to international trading standards, as a means of allaying concerns of foreign counterparties nervous about contracting with Northern Irish companies in light of Brexit. International trading standards cover a much broader set of issues than just risk and delivery and no matter what happens regarding Brexit, they will remain the same.
Post Brexit, a choice of Northern Ireland law will likely be upheld by EU courts, regardless whether or not the Rome Regulations continue to apply in the UK. However, it is important to ensure that all contracts include a governing law clause, because the UK leaves the EU, UK courts and courts in EU member states may apply different tests for determining the governing law of a contract where none is specified.
Jurisdiction and dispute resolution
Brexit could make it more difficult to: (a) have Northern Irish jurisdiction clauses recognised; and (b) enforce Northern Irish judgments in the EU. This could effectively render Northern Irish judgments meaningless against EU counterparties. Therefore we suggest you ensure that your contracts include dispute resolution mechanisms such as mediation or independent expert clauses to reduce the risk of a dispute ending up in court in the first place. You may also wish to consider amending your jurisdiction clauses in contracts with EU counterparties so that they are non-exclusive. This would give you the flexibility to bring proceedings in Northern Ireland or in an EU jurisdiction (which may be more advantageous if a Northern Irish judgment cannot be enforced in the EU).
Brexit is likely to bring significant change to the legal and commercial world. To protect your business, we suggest you review your existing contracts and trading relationships and put in place appropriate contingencies. Adopting a broad and flexible approach is probably the best way to prepare for the uncertainties ahead.