January 16, 2019

Brexit: frustration of contracts and practical strategies for businesses preparing for ‘no deal’

As UK plc moves towards 29 March 2019, many businesses are already preparing for a potential "no deal" Brexit outcome. In legal terms, this means that the UK would leave all of the institutions of the European Union on that date as a "third country".

This is the default position in the event that the UK's two year long notification under Article 50 of the Treaty on the Functioning of the European Union expires without a withdrawal agreement in place. 

Many businesses have already made so-called "hard Brexit" contingency plans. 

A key area of risk from a legal perspective is the ongoing validity of existing commercial contracts. A large number of contracts (particularly those drafted before the announcement of the UK referendum in 2016) will not have been drafted with Brexit in mind, and so do not contain express provisions to deal with the impact. 

Most clauses include a provision which seeks to deal with "force majeure", effectively 'frustration' of the contract caused by unforeseen factors outside of the parties' reasonable control. Such clauses typically deal with "acts of God, flood, drought, earthquake or other natural disaster". It is far from certain that such clauses, or the English law doctrine of frustration, will help contractors seeking relief from contractual obligations after a hard Brexit. 

An example of the type of dispute that can arise is that of the European Medicines Agency's relocation to Amsterdam after Brexit. The Agency is seeking to terminate its lease at London's Canary Wharf on the basis that the contract has been "frustrated" by Brexit. 

For businesses across the UK, preparation for Brexit is taking many different forms. Whilst it is reported that over £800bn of assets have already been moved from the UK in readiness for Brexit, the very practical reality is whether suppliers and customers will be able to continue to trade as on current terms. Issues to consider now include:

1. Reviewing key contracts for Brexit preparedness, and seek to vary or amend contracts as needed with suppliers. 

2. Identify supply chain gaps and potential stress points through category management of your key relationships and their dependency on frictionless trade and tariff/quota free export control. Rules of origin requirements could mean that the origin of materials used as major inputs in manufacturing would need to be documented. Many businesses are considering obtaining "Authorised Economic Operator" status to benefit from faster customs control as a trusted trader. 

3. Considering currency hedging arrangements to shield the business from currency fluctuations which may arise from a no deal Brexit. Changes to VAT rules and the need to hold more stock could impact on businesses' cashflow.

4. Product compliance after Brexit. Technical, non-tariff, trade barriers could include a need to register products for sale in the EU as compliant with EU standards.

There is no "one size fits all" for Brexit preparedness for business. While much of UK plc is already underway with contingency planning, looking at key contracts now could help to avoid disputes later. 

For more information or advice on this or any other Brexit issue, please contact David Hansom, Partner on 0207 876 4127 / david.hansom@clydeco.com or your usual contact at Clyde & Co.