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Europe’s uncertain future: how should businesses ‘Brexit-proof’ contracts?

26 January 2017
The Times (subscription required)
The Prime Minister's Lancaster House speech has shed some light on the Government's goals and we now know that Parliament must vote before Article 50 is triggered but it remains difficult to predict exactly what Brexit will look like. It is clear that there will be some significant changes. Businesses are already assessing whether existing contractual obligations might become more onerous or expensive to perform, which will inevitably lead to disputes regarding which party should bear any additional costs or risks and whether the contract remains viable.

One of the key areas being discussed is the nature and extent of the UK's access to the single market. Changes in this area may alter the costs of performing a contract significantly for one or both parties.

In particular, if Brexit results in tariffs being put in place between EU countries and the UK then it seems likely that disagreements will arise regarding how those tariffs will be borne, and who should deal with the practical costs and logistical risks associated with compliance with additional customs procedures.

Disagreements will also likely arise over whether Brexit falls within the scope of existing price-adjustment provisions and parties may even try to argue that the performance of their obligations under a contract have become so uneconomic or onerous that they are entitled to bring the contract to an end.

Another much-discussed issue is how UK companies will continue to provide financial services to entities elsewhere in the EU. If the 'passporting rights' currently available are not retained or some equivalent regime is not put in place, businesses could find themselves with significant financial, practical and regulatory difficulties to overcome. In some cases, a contract may even become legally or practically impossible to perform. In this context, the interpretation of clauses intended to deal with unforeseen events as well as default, termination and assignment provisions is likely to give rise to disputes.

A multitude of disagreements could also arise from the need to interpret contracts in light of the new reality: for example, where the territorial scope of an ongoing agreement is the EU, does that mean the EU as it stood when the contract was signed or does the UK fall outside the contract's scope after Brexit?

Disputes will not only arise once impact of Brexit it known, but are already emerging from the uncertainty created by the referendum result and its impact on the value of the pound. Premier Foods is the latest large food manufacturer in discussion with British supermarkets over who should bear increased production costs. Many other companies across a range of sectors whose costs have changed substantially in the wake of the pound's devaluation are now being squeezed, providing fertile ground for disputes.

In view of the variety of risks presented by Brexit, most businesses are considering what can be done to 'Brexit-proof' existing and future contracts. It is certainly possible to build in provisions to mitigate the risks associated with Brexit where those risks can be identified. Examples include: termination or renegotiation options and price or performance adjustment provisions dealing in advance with matters likely to be affected by Brexit.

The greater challenge for businesses is to deal with the “unknown unknowns”, the risks that have yet to be identified. This requires an ongoing strategy which seeks to identify and address these risks as the shape of the future UK/EU relationship emerges.

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Related Information

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    T +44 20 3130 3704
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