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Contracts in the post-Brexit world

Risk management ought to be at the heart of any company's approach to drawing up contracts for the Brexit environment, say Richard Smith, Partner, Corporate Group, and Stuart Pickford, Partner Commercial Dispute Resolution Group at international law firm Mayer Brown

Businesses are already planning ahead to ensure that they are prepared for the UK’s exit from the European Union. Although the likely agreement of a transition period until 31 December 2020 is to be welcomed, the future trading relationship between the UK and the EU is far from settled. Anyone involved in the drafting and negotiation of long-term commercial contracts should consider the effect of the UK’s withdrawal on those contracts, looking at the commercial, regulatory and legal impact of Brexit on contract performance, as well as ensuring that Brexit will not introduce any unintended consequences arising from how the contract is drafted.

Brexit will not generally affect English contract law. Known internationally for its emphasis on upholding the commercial bargain between parties, English law will undoubtedly remain widely used in cross-border contracts. If parties decide to have their contracts governed by English law, that decision will continue to be upheld by UK and EU member states’ courts. The position on cross-border jurisdiction and the enforcement of judgments is more difficult, but where contracts contain exclusive jurisdiction clauses in favour of the English courts, that choice will generally continue to be respected by EU member states during and after the transition period.

The terms the future UK/EU trading relationship, and the wider economic implications of the UK leaving the EU, could have a significant impact on particular contracts – some may become more difficult to perform, whilst others may be affected by future changes in the legal or regulatory environment. Those entering into a new long-term contract should examine how their rights and obligations could be affected by various Brexit outcomes. But what can be done to try to address Brexit in a contract?

Commercial agreements typically include wording to address what should happen when performance of the contract is affected by something outside each party’s control, through what is known as a force majeure clause. There may be scope for arguing that a particular force majeure clause covers Brexit-related risks. However, this will depend very much on the drafting of the clause in question: the wording might not cover all risks or its scope might be uncertain. Consequently, it makes sense to deal expressly with Brexit, either in an expanded force majeure clause or elsewhere in the contract.

So what should parties consider including when trying to address Brexit in a contract? The answer very much depends on the subject-matter of the contract and an assessment of how it might be affected by Brexit.

Risk management

Anyone entering into a long-term contract involving the supply of goods from the UK to an EU member state, will no doubt be thinking about issues such as the risk of delivery problems if long delays at channel ports were to become a reality, whether any future changes to product regulatory requirements will make performance more difficult or expensive, and which party should bear the economic risk of any new tariffs. UK suppliers, particularly those supplying cross-border services, may want to reserve the right to transfer their rights and obligations to group companies in the EU, in anticipation that future trade barriers could adversely affect the supply of services from the UK into the EU post-Brexit.

In order to deal with these and other potential issues, contracting parties will need to identify how their position under the contract might be adversely affected by Brexit (perhaps by prioritising issues according to likelihood and severity of impact) and whether it is appropriate to address any adverse effects in the contract wording. Where potential adverse effects are identified and sought to be addressed, defining the catalyst, effect and outcome (or ‘CEO’ for short) will be the crux of the matter. The ‘catalyst’ is the event or act that will bring the provision into play; the ‘effect’ is the impact that the catalyst must have; and the ‘outcome’ is what the contract prescribes as the consequence.

The CEO concept

For example, the imposition of a tariff (catalyst) might increase a party’s cost of performance to an uneconomic level (effect), which might then result in an agreed price adjustment (outcome).

However, even if the parties can agree on the CEO concept, identifying precisely what will bring the provision into play and how it will operate may involve difficult negotiations. By the same token, there are dangers with trying to be too prescriptive – a tightly drawn provision might be too inflexible to address unforeseen risks or it might just be too early to know what outcome will be appropriate if a particular risk materialises.

It may, therefore, be more appropriate to address the CEO concept in more general terms; for example, using terminology along the lines of a material adverse effect on a party’s ability to perform the contract, and by giving the parties the right to terminate the contract or by including an obligation to attempt to renegotiate the affected part of the contract (or a combination of both: negotiation first and then termination if appropriate amendments cannot be agreed).

However, it goes without saying that the price of opting for the general over the specific is uncertainty and a greater risk of future disputes. Depending on the circumstances, a generally wording clause could be useful ‘catch all’ as well as encouraging the parties to focus on how Brexit risks which have not been specifically identified should be addressed.

Good contract negotiation is a matter of anticipating uncertainty and agreeing how risk should be allocated – and Brexit is no different. In addition to addressing these issues before entering into new contracts, it makes good sense to review existing standard terms and any key contracts that will remain in place post-Brexit to make sure that they will remain fit for purpose. There may be opportunities to renegotiate existing contracts over the coming months or at least to put in place plans to mitigate any difficulties which might lie ahead.

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