Brexit: feeling contractually frustrated?

Since 2016, when the UK voted out of the EU, the potential impact of the Brexit on commercial contracts is still unclear. With 3 postponements in the exit, it doesn’t get any clearer. Say, you run a commercial cross-border business, should you sit down and wait till the storm settles? Or is the upheaval caused by the Brexit reason to get out of (potentially disadvantageous) contracts?

Earlier this year, in a decision undoubtedly heartily welcomed by many UK landlords Canary Wharf v European Medicines Agency [2019], the High Court handed down its first ever judgement on the question of whether Brexit can constitute a frustrating event. To spill the beans: it doesn’t! The European Medicines Agency (EMA) – the EU agency responsible for the approval of medicines – argued that its 25-year lease on premises in London, granted in 2014 and worth a whooping £500 million, with the Canary Wharf Group was “frustrated” by Brexit. Unfortunately for the EMA, the High Court held that, in this case, the lease had not been frustrated by Brexit. Consequently, the EMA remained liable not only to pay rent but also to perform its other contractual obligations for the remainder of the term. EMA appealed but has since commercially settled with CWG and EMA consequently moved to Amsterdam in March this year. Due to the settlement, unfortunately there still is no clear answer on whether Brexit could constitute a frustrating event in any contract. However, the approach taken by EMA to settle (by means of sub letting the space for the remainder of the term to another party) shows that a commercial solution is possible.

General contract clauses

So, it appears the doctrine of frustration would not work to get out of a potentially bad deal because of Brexit. Under English contract law, a contract is “frustrated” if an event occurs which the parties could not have foreseen at the time they entered into the contract and that radically alters the parties’ performance of the contract in such a way that it would be unjust for the parties to continue. Since the effect of frustration is to release the parties from further contractual performance, the bar is set high by the courts.

Now frustration will be hard to claim, are there contractual means that would work? In contracts, we wish to “expect the unexpected” and as such, many agreements include express termination rights to deal with unexpected adverse events:

  • Force Majeur: a standard boilerplate clause in many contracts. It generally works in such a way that it allows a party to suspend or terminate performance in event(s) beyond the reasonable control of that party. Think: natural disaster (aka “acts of God”) or the outbreak of hostilities.
  • Material Adverse Change:  You typically find this clause in lending and corporate acquisition agreements. It generally operates to allow a party to suspend, terminate or vary its obligations (depending on the wording of the clause) on the occurrence of an unforeseen event that is detrimental to the party.

Chances are unlikely however, that you would get any respite because of Brexit under these general clauses. Especially, since Brexit entered our lives already in 2016, for contracts entered into after June that year it will be difficult to argue that the adverse effects are now unforeseen. No matter how vague the status may be.

So, should you include bespoke Brexit clauses in your agreement and if so, which one(s)?

Specific Brexit clauses

A Brexit clause provides some protection against Brexit related risks in triggering change in parties’ rights and obligations because of a defined Brexit event. Bear in mind: you don’t always need specific Brexit clauses, for example in cases where you may terminate on short notice or with short-term contracts. For more insight in general terms that you may wish to check Brexit wise, check our previous blogpost.

Are you entering into a long-term contract involving UK companies? Then you may wish to consider following Brexit specific options:

  • Requirement to renegotiate: This kind of clauses provide a degree of flexibility for the party invoking the clause that may be advantageous given the unpredictability of Brexit. It requires parties to renegotiate if Brexit has a material adverse effect on the contract. The party affected by Brexit may request renegotiation of the contract and, if no agreement can be reached, the party affected by Brexit can terminate. Nice if you are the affected party, but what if you are the other side? You then face the prospect of early termination unless you accept the less favourable terms proposed in the renegotiation. Consequently, you may insist that the triggering adverse event is well defined by reference to for example costs and market prices.
  • Termination for convenience
    A “termination for convenience” clause needs to be carefully considered & sufficiently broadly drafted to capture the events that should fall within the scope (for example: changes in regulatory requirements or imposition of tariffs). The clause itself would give a right to terminate if performing the contractual obligations would result in an adverse effect specifically because of the Brexit.
  • Variation as a result of a specific event
    You may opt for a clause that providing a specific event, such as where Brexit causes a major currency fluctuation or a major disruption in your supply chain, triggers a consequence such as a price adjustment by a set amount.

Conclusion

Due to the fact that we still cannot foresee exactly what the Brexit will bring us in terms of contractual relationships, a “one size fits all” solution when it comes to contracts and Brexit is impossible. If and when you trade with the UK, make sure to review your key contracts and consider how these and future contracts would be affected by the Brexit. If possible, renegotiate existing contracts and make sure to include specific Brexit related clauses in future contracts.

Not entirely sure your contracts are Brexit-proof?

Let us review the Brexit risks for your company! Contact us to discuss the possibilities