Brexit clauses – an update
In the initial aftermath of the Brexit vote in 2016, we published a short blog on the inclusion of Brexit clauses in contracts, see here. This new blog identifies some of the contractual issues we have encountered since then relating to Brexit. Addressing potential risks relating to Brexit in contracts has been given increasing focus by many of our clients because of the uncertainty over the shape that Brexit will take – particularly whether we will have a managed exit with a transition period and trade deal or not (the “Hard Brexit” scenario).
Force majeure clauses absolve parties of their contractual responsibilities if circumstances beyond their control prevent their fulfilment. Common examples are acts of God, war, or industrial action. Previously often given little focus and treated as part of the contract “boilerplating”, whether Brexit is a circumstance that would or should come with the definition of a force majeure has been increasingly debated in contract negotiations.
We are finding that to help avoid uncertainty, parties are choosing to expressly exclude Brexit from the definition of a force majeure event. As long as the contracting parties have, as far as possible, assessed and made provision for the potential consequences of the different Brexit scenarios, then this can be a sensible position for both parties to adopt, because the end result of Brexit is still unknown so including Brexit into a force majeure clause in a fair and enforceable way is difficult. It may be preferable to consider “hardship” clauses or other mechanisms to given your contract the flexibility that the current unpredictable landscape requires.
We are now experiencing some contracting parties requesting the inclusion of express indemnities for any issues caused by Brexit. Some of the main concerns are around disruption to supply lines caused by licensing/regulatory issues as well as customs and border checks . In modern logistics operations short delivery times means that companies no longer retain much storage space nor keep large quantities of stock.
Indemnities may seem like a great way to protect your position as they shift the risk of undesirable effects of Brexit onto your counterparty. However, careful drafting is needed to ensure you get the cover you need and they are only of use if the party giving to them is able to honour them (which won’t be the case if they are pushed into insolvency).. Although certainly better to have than not, in practice, it is rarely in a party’s interests to have to claim under an indemnity – practical mitigation is usually a better option – so check your suppliers have made appropriate plans to deal with any negative effects of Brexit.
Contracts may be “frustrated” if an event outside of the control of the parties renders performance of the contract physically or commercial impossible. The effect is that the contract “falls away” and each party is released from ongoing obligations. The bar is set high for frustration – the event needs to have radically changed the nature and performance of the contract – it’s not enough for it simply to have caused hardship or inconvenience and its usually only effective in cases of war or similar, but a case currently progressing through the courts is testing whether Brexit may frustrate a lease. See our detailed blog here. The result of this case has implications not just for property cases, but also for general contract law because it will give an indication as to how a court might view Brexit.
Update 8th March 2019: The case between Canary Wharf and the European Medicines agency has now been heard in the High Court, where the judge has ruled the in this case Brexit did not frustrate the lease. However, the judge did find that Brexit was not a “reasonably foreseeable event” when the agreements for lease were signed (in August 2011), so the ruling does not necessarily preclude parties from claiming Brexit as a frustrating event in relation to other contracts signed before Brexit became reasonably foreseeable. The EMA do also have the possibility of appealing the ruling.
For more information about Brexit clauses, please contact Kathryn Rogers at email@example.com or 01892 506 147.