12 August 2016
Contract law generally consists of legal principles developed and maintained by English Courts. As such, it should be broadly unaffected by Brexit. That said, Brexit may have a disruptive impact on commercial contracts due to the potential to affect the commercial bargain underlying those contracts.
The impact of the imposition of import tariffs between the EU and non-EU states and changes in VAT and other tax structures may result in the contractual pricing mechanism becoming loss making or too costly for the party that has to bear the additional import or export costs.
Free Movement of Workers
Unless negotiated otherwise, the EU principle of the free movement of workers will no longer apply. This will impact on the costs and management of a cross-border workforce that is skilled and experienced.
Force Majeure, Frustration and Material Adverse Change
It is often the case in financially uncertain times that these provisions come under scrutiny:
- Force Majeure – the general market consensus is that it is unlikely that force majeure clauses will be triggered in the absence of wording specifically contemplating Brexit;
- Frustration – the doctrine of frustration has been consistently applied narrowly by the Courts. It will not apply in circumstances where a contract has become more difficult or expensive to perform; and
- Material adverse change – it could be easier to argue that the financial consequences of Brexit constitute a material adverse change. However, not every contract includes such a provision.
Given Sterling’s recent volatility, exchange rate changes could seriously impact on pricing and costs. Parties to contracts that are no longer economically viable should review termination rights or seek to renegotiate the commercial terms.
Change in Law
Analysis of clauses dealing compliance with law and changes to law will be essential. In particular, the costs of compliance will be key in future commercial negotiations as parties seek to agree who has responsibility for monitoring compliance and who picks up the cost to ensure the service or goods is compliant with any new regime.
When negotiating a new contract, it is advisable to consider how that contract will be affected by the UK’s eventual departure from the EU. Options include:
- Expressly including the UK leaving the EU in any force majeure or material adverse change clause;
- Providing the parties with termination rights when the UK leaves the EU (depending on the terms Brexit ultimately takes); and
- Providing for or referring to an alternative pricing mechanism which will apply once the UK leaves the EU and new tariffs and changes to cross-border taxes are known
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