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The Brexit Factor - Impact on commercial contracts

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The Brexit Factor: Impact on Commercial Contracts

Whilst the full and true effect of leaving the European Union is a much debated topic - and one still very uncertain - companies can still plan ahead to reduce the potential impacts.

Market fluctuations, increase in material costs, changes in legislation – these are just some of the potential consequences of the United Kingdom’s withdrawal from the European Union that we are now looking to protect against for our clients. This article explores and considers the impact of Brexit on business to business contracts and the importance to consider the inclusion of a Brexit clause.

Whilst the term 'Brexit Clause' is a new phenomenon, the reasoning and underlying structure is nothing new. Many contracts for the supply of goods and services will include standard clauses such as 'Force Majeaure', 'Material Adverse Change', 'Compliance with Law', 'Change of Control', 'Hardship' or 'Termination Right'. As a generalisation these clauses aim to protect against circumstances similar to the 'Brexit factor'. There is no guarantee (and presently it is highly debated) that the current provisions within contracts do not protect against Brexit. What there are, however, are clauses that are, effectively, an 'if / then' clause which outlines what will happen in the event of legal / business / financial changes during the contract.

When considering drafting in a Brexit Clause there are two possible circumstances (though there can be a combination of the two in certain circumstances) that may be covered:

Specific Event / Specific Circumstance

The Specific Event / Specific Circumstance position what will detail upon the occurrence of certain outcomes (such as the exchange rate dropping below certain level) then what will follow will be the circumstance (such as the price paid for the material being increased / decreased).

Trigger, Renegotiation, Termination

In this scenario when a certain outcome is met (looking again at a fluctuation in the exchange rate) then the party affected by such change can then renegotiated the terms of the deal (variation on the price paid). If however an agreement cannot be reached then the affected party can terminate the agreement.

It is clear that time is needed when drafting the agreements / contracts that a Brexit clause (or similar) is considered. Think about what could happen, what the contract current says, what doesn’t it say and how do you want the contract to perform in the event of the something happening. All 'if / then' clauses clearly come with different degrees of risk and to consider which possible (or combination) best fits then advice from a specialist is needed.

Once question that remains (both from a legal and political standing) is how do you define and what is Brexit? Will it be a “Soft Brexit”, “Hard Brexit” and will we remain part of the single market? All factors are key and great care must be taken to define exactly when such clause can be invoked.

If you need to discuss any aspect of a drafting commercial contract further, please feel free to contact our commercial law team on 01616 966 229.