Possible implications of a ‘No Deal’ Brexit for commercial contracts


Author: Leigh Callaway, Gerald Brent


Leigh Callaway, Senior Associate, Fladgate LLP (lcallaway@fladgate.com)

Gerald Brent, Trainee Solicitor, Fladgate LLP (gbrent@fladgate.com)


 

Despite a wealth of proposals, no clear majority has surfaced for any single legislative option in the House of Commons to manage the United Kingdom’s departure from the European Union (Brexit). As such, as an operation of law on 29 March 2019, without an agreed or managed exit (a No Deal), contracts, domestic and international, will need to be reviewed for their effectiveness. Here we explore the potential effects of a No Deal on typical contractual terms.

Termination

Although a No Deal Brexit may render an agreement costly for at least one of the parties to it, it is highly unlikely that a party will be able to unilaterally terminate the agreement – at least pursuant to the wording of termination rights most commonly drafted into documented commercial arrangements. One exception to this will be found in contracts which provide for a future No Deal Brexit (so-called ‘Brexit clauses’), and which may allow a party disadvantaged by Brexit to, for example, terminate the agreement. More generally, express termination for convenience rights will all times allow at least one party to terminate the agreement.

Repayment

Similar to termination clauses above, unless there are included in the agreement specific provisions which provide for what happens upon a No Deal Brexit, it is highly unlikely that regular commercial contracts drafting will trigger the repayment of monies which have been transferred to a counterparty under the terms of a contract.

Force Majeure / Material adverse change clauses

In respect of force majeure clauses, the devil is in the definition. Consideration should be paid as to whether or not the nature of a No Deal Brexit falls within the limits of the category of event defined as force majeure in the agreement. Badly drafted or even simple force majeure clauses may prove uncertain or indefinite enough for exploitation, where it is possible that a defaulting party might consider relying on force majeure to avoid liability for its default(s). Other than in these scenarios, it is unlikely that a Brexit-related change will allow a party to successfully argue that a force majeure clause has been triggered.

In the case of less common material adverse change (MAC) clauses, often found in loan agreements, whether or not a Brexit-related change triggers such a clause will likely depend largely on how the clause is drafted and whether or not the lender (or borrower) knew of the prospect of such changes when it entered into the agreement.

Hardship

Generally speaking, there is no doctrine at common law which provides relief for a party to an agreement due to that party’s financial hardship. However, like force majeure above, parties which have freely contracted to provide for this circumstance may find that a No Deal Brexit may qualify.

Frustration

In the absence of express provision for Brexit or an express force majeure clause, the common law doctrine of frustration may apply.

Much will depend on the context of the contract itself, although it is notable that typical examples (at common law) of frustrating events have been held to include the unavailability of the subject matter (where a No Deal Brexit might cause material delays or even stoppages in supply chains); a supervening illegality or where a change in the law renders performance of the contract illegal (where a No Deal Brexit might mean certain contracts entail the performance of illegal acts/behaviours, e.g. fishing in certain waters); and cancellations or delays of expected events taking place (where a No Deal Brexit may mean customs controls causing delay at border crossings).

However, for an event to be deemed to be frustrating it must have been entirely beyond what was contemplated by the parties when they entered into the contract.[1]

Change in law

The changes in law which a prospective form of Brexit might take may not render a contract terminated or frustrated but they may very well lead to huge implications because the applicable legal rule governing an important provision has now changed. Agreements should be reviewed to determine which party, for example, will bear the burden of any customs charges or the commercial consequences of border delays. Such an exercise may require wholesale negotiation of contractual arrangements.


[1] Indeed, this is likely to be one of the main issues at hand when the High Court decides whether to favour Canary Wharf Group’s (as landlord) application for a (pre-emptive) declaration that its lease to the European Medicines Agency (as tenant) will not be frustrated by Brexit. This case will be monitored by commercial interests and its ruling, expected prior to March 29, is likely to create precedent beyond landlord and tenant law in respect of commercial contracts and Brexit.


 

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