Your contract, Brexit, the Brexit clause, our recommendation

The law is not sympathetic toward a person whose contract has become more costly or onerous. Without express provision there may be no entitlement to vary terms or terminate a contract that becomes a bad bargain. In the context of Brexit - with wide ranging commercial ramifications - your contract may become a "ball and chain".

Down the years contracts have made particular provision to cater for change in circumstance in the following ways:

  1. Specific change requires specific variation: for example, if supplier costs increase by X% prices are to be adjusted by Y%. (mechanical)
  2. Change or event requires renegotiation and if unsuccessful allows termination: for example a change in immigration laws renders worker provision more difficult. (negotiation)

Both types of clause rely heavily upon identifying and correctly drafting the change or event to get a sure pull of the "trigger".

That drafting might well prescribe not only that the event or change has to have taken place but that it must also be shown to have an adverse impact on the party seeking to pull the trigger. Examples, all of which require crafting according to the circumstances, include:

Ability to perform. An adverse impact on a party's ability to perform the agreement in accordance with its terms and the law - e.g. licensing, tariffs, manufacturing standards, migration.

Increase in costs of performance. An increase (above a specified percentage) in the costs incurred by a party in performing the agreement, when compared against the date the price was last agreed.

Price too low. The price for the products dipping (by a specified percentage) below the market price for similar products or services (this would be a trigger for the supplier).

Price too high. The price for the products or services increasing (by a specified percentage) above market price for similar products (this would be a trigger for the customer).

Customer cannot use/sell. The customer suffering an adverse impact on its ability to sell or commercially exploit the products or services (this would be a trigger for the customer)

Bear in mind that several factors in combination may come to bear on a party for which the drafting must cater. Not only this, both parties may be impacted and quite possibly in different ways so that more than one of them may wish to have the benefit of one or other clause - possibly based on different triggers.

Should the contract state that the change or event should be caused by Brexit? Our recommendation is "probably not". None of us know if Brexit will occur on a day or by phases. In any case we recommend protection against factors actually affecting performance regardless of the background political driver. The opposite party however may wish to confine the freedom to vary/ negotiate/ terminate by tying it to Brexit.

Where an existing contract does not already make provision along these lines, or is seen now to do so inadequately in the context of Brexit, the position is much less assured. There may be a force majeur clause drawn widely enough and the law has sometimes come to the parties' aide through the doctrine of frustration or the importation of implied terms.

The court would ask, amongst other things, at what point did Brexit (and its effects on the contract) became something the parties themselves could have been expected to cater for? At earliest that date might be that on which David Cameron announced his intention to hold a referendum - ie quite some time before the referendum date was set. At latest that date might be the day of the shock result. A party contracting before that date conceivably may more easily be relieved of the ball and chain.

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