Blog - 21/04/2018
On 29 March 2019 at 11pm, the United Kingdom will officially withdraw from the European Union. Whilst the full and true effect of leaving the EU is still very much a hotly debated topic, companies have already begun planning ahead to try and limit the adverse effects Brexit may have on their businesses and the inclusion of a Brexit clause is becoming a more commonplace to achieve just this. For example, Ryanair, the low cost airline, has recently announced that it will include a clause in its UK customer contracts that will render tickets invalid if the UK government is unable to resolve the issues surrounding aviation regulations post Brexit.
Brexit clause is a provision in a contract that triggers some change in the parties’ rights and obligations as a result of a defined Brexit-related event occurring. Two types of Brexit clause are generally considered:
- Specific event, specified consequence
Here, if a specific event occurs (such as currency exchange fluctuations), a specified consequence follows (such as the price of a product being adjusted accordingly).
- Trigger, renegotiation, termination
Here, if a defined trigger occurs (for example the imposition of tariffs or a change in regulatory requirements) then the affected party is able to request a renegotiation of the contract. If the renegotiation cannot be agreed then the affected party can terminate the contract.
Whilst the inclusion of a specific Brexit clause into a contract is a relatively recent trend, the underlying reasoning behind its inclusion is nothing new. Many contracts include standard clauses addressing potential impacts of future change, such as force majeure and Material Adverse Change (MAC) clauses, and Brexit clauses are just a variation on this familiar theme. So much so that it is possible that the consequences of Brexit could trigger an existing force majeure or MAC clause. For example, if a UK entity is no longer able to carry out certain services in the EU following Brexit, this could constitute a material adverse change or even a force majeure. It might even be possible to argue that such a scenario could trigger the common law doctrine of frustration as performance of the contract may be rendered impossible.
However, there being a sufficiently serious Brexit-related consequence to meet the threshold of an existing MAC or force majeure clause, that was not in the reasonable contemplation of the parties when the contract was formed, will only be the case in very specific circumstances. Therefore, a standalone Brexit clause may be advisable, even if just a precaution.
When assessing whether a Brexit clause should be included, the following issues should be considered:
- What could happen as a result of Brexit
A company should consider how Brexit may affect their performance and cost, both directly and indirectly (for example somewhere within their supply chain). This may include consequences from changes to tariffs on goods, freedom to provide services, freedom of movement of workers, licences and consents, changes in law, currency exchange rates and other financial factors such as a dip in consumer spending or a rise in the cost of borrowing.
- If there is an existing contract, what it currently says
Who would bear the additional responsibilities and costs as the contract is currently drafted? Could a force majeure, MAC or similar clause, or even frustration, be relied upon should any of the changes mentioned above have an adverse effect on a party to the contract?
- Specific events and specified consequences
Are there any specific events for which the parties feel confident about providing specified consequences? By their nature, specific event and specified consequence clauses will have to be bespoke and there is a risk that not all events and consequences will be provided for.
- Trigger, renegotiation, termination
Is it in a party’s interest to have a clause allowing for renegotiation and, if that fails, termination, on the occurrence of certain triggers? The risks of using this type of clause is that the party not affected by the Brexit trigger faces the choice of accepting less favourable terms or an early termination of the contract. The party that is affected may find the trigger too narrow to capture what has actually happened. In addition, the affected party has no certainty that it will be able to successfully renegotiate the contract.
Must the party invoking the clause show that Brexit has caused the problem? This in itself brings about a number of issues, as proving that a particular adverse impact on a party (such as an increase in costs) has been caused by Brexit may be difficult. A party seeking to limit the situations in which the clause could be invoked might want to provide that the clause may only be invoked if an adverse impact is directly or solely caused by Brexit.
Given that the actual and true effect of Brexit on any business arrangement is far from certain, Brexit clauses are far from being ironclad protection from the possible adverse effects that may come with leaving the EU.
However, as Brexit could affect almost every aspect of doing business, a Brexit clause limiting a party’s exposure to the potential consequences of Brexit may be something that companies ought to consider as March 2019 approaches.
If you have any further questions or concerns regarding the above topic please contact any member of the Edwin Coe Corporate & Commercial team.
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Please note that this blog is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content of this blog.
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