Business Law & Compliance

Brexit clauses: Is it all too little, too late for businesses?

7 min read

21 March 2019

With the threat of a ‘no-deal’ Brexit now a strong possibility, some companies are focused on continuing business as usual and ignoring the risk, whilst others are understandably putting off entering into new material contracts. Either course presents adverse financial consequences and begs the question, can a company protect its investment by use of Brexit clauses?

Brexit has the potential to directly or indirectly affect almost all transactions that businesses enter into, and it is important that appropriate protection plans are put in place to apportion the risk between the parties to the transaction.

Suppliers should be considering the events which may directly impact them, as well as anything which may affect their supply chain. Customers should be alive to the effect Brexit will have on their ability to use goods or services purchased under an agreement, as well as how the market for their own products may be affected.

A no-deal Brexit could cause a ripple effect through supply chains and may even affect legislation

Further to affecting supply chains as regards speed, administration, and costs, a no-deal Brexit would alter freedom to provide services, licences and consents, and freedom of movement for workers, as well as sparking necessary changes in law. Additionally, there may be fluctuations in currency exchange rates, rises in inflation and the cost of borrowing, and consumer spending may dip, all of which have the power to have a material adverse effect on an organisation’s financial condition.

A Brexit clause can provide protection against adverse circumstances arising as a result of the UK exiting the EU. These clauses can cover several different areas, including the specific Brexit-related event triggering the clause; and the consequences of that event, which may include termination of the contract.

Since the referendum, parties undertaking projects backed by substantial capital have factored Brexit clauses into their high-value commercial contracts as a way of keeping the door open as a potential exit route.

What about manufacturing?

Being most susceptible to the effects of leaving the EU, manufacturing companies and those in the hospitality and leisure sector may be more inclined than others to rely on Brexit clauses to protect themselves in the event of a large customer scaling back orders or a drop in the number of tourists.

However, there are some pockets of UK industry where this hesitance and protectionism is not so apparent. Entrepreneurs, for example, are by their nature often natural risk takers and in a number of cases, Brexit will not prove a strong enough reason to scale back commercial activity.

In uncertain climates there are always opportunities to be had and, in many ways, the marketplace relies on deals continuing to be struck and contracts made to maintain its momentum.

Brexit clauses: The pros and cons

Although a Brexit clause may be a sophisticated way for organisations to escape an unprofitable, and potentially business-critical situation, it isn’t always the perfect tool. Since terminating a contract also terminates any chance of the business turning a profit from the contract, triggering a Brexit clause can leave businesses on the back foot, stung by the costs of an unfulfilled contract.

The phrase ‘Brexit clause’ is a catch-all term and there are a number of stipulations which frequently appear in commercial contracts which aim to allow for termination, in the event that any situation caused by Brexit puts the contract in jeopardy. An example of which is a force majeure clause, which relates to unforeseen circumstances arising, preventing a party from fulfilling a contract. However, often, without the inclusion of an express reference to Brexit, it is thought that a force majeure clause offers little to no assistance.

Clauses dealing with frustration of a contract are sometimes but rarely included in commercial contracts and could be considered a form of Brexit clause. A frustrating event can be defined as one which was not considered at the agreement of the contract, or one which was unexpected.

‘Frustrating’ explained

In the absence of an express frustration clause a party may seek to rely on the common law right of frustration, an event which constitutes as ‘frustrating’, will release parties bound in a contract. However, relying on a frustration clause in the case of Brexit is easier said than done – in the event of a legal battle, the courts have extremely high standards as to whether a Brexit-related event can be constituted as frustrating.

Recently, the High Court was asked to decide whether Brexit could frustrate a contract in the case of the European Medicines Agency (EMA) v Canary Wharf Group over a £13 million-a-year lease of premises at Canary Wharf which runs until 2039, with no break clause. They ruled that the EMA was unable to rely on the frustration and was therefore bound to fulfill the terms of the 25-year lease notwithstanding its need to relocate its business back into the EU.

This landmark ruling may come as a warning to businesses which are on the brink of entering into a high-value commercial contract: prevention is most likely better than cure. If it is possible for businesses to delay making these decisions slightly until the “No deal” risk is clearer, then potential risk could be minimised.

It’s never too late to operate as a sound concern

Although in some cases it may be too late for businesses to worry about the inclusion of Brexit clauses in contracts, the rules of good business still apply and adopting a degree of caution and a level of protection would be a shrewd move going forward into yet more uncertain times.