We strongly recommend that all businesses with suppliers based in the EU should review the terms of the contracts they have in place with these suppliers. It is generally advisable for any business to keep its contracting arrangements under constant review to address changes in circumstances and legislation, but in the context of a possible No Deal Brexit it may be vital to do so.
In particular businesses should identify, locate and focus on the highest risk supply contracts. When considering the risks associated with suppliers, remember that the risk is not just limited to the value or nature of the purchases but may be affected also by the availability of other suppliers, exclusivity provisions in the contract or circumstances whereby the business is reliant on the particular supplier for some other reason.
Reviewing current contracting arrangements could be very important. The purpose of the review should be to understand how the contractual rights and obligations may be affected by the effects of Brexit, the risks in relation to breach of the contract and the scope for disputes in relation to the same and to identify the points the business would want to renegotiate either in relation to the current contract (if possible) or in any renewal contract.
Key points to consider in a contract review
- what are the main legal or practical issues that will impact the contracting arrangements relating for example to costs or delays in performance?
- which provisions in the contract might be renegotiated to mitigate the effects of Brexit?
- How could the effect of the contract terms be affected by changes in legislation regulating or relevant to the business for example the law relating to intellectual property or consumer protection?
- what are the rights on either side to terminate the contracts (see below)?
Note that when reviewing the terms of existing contracts, Brexit may give rise to some questions of interpretation of the contract terms for example with regard to the interpretation of any definitions of or references to the EU or EU legislation.
Right to terminate existing contracts affected by Brexit
If the consequences of Brexit might make it difficult or undesirable to perform a contract, it may be necessary to consider the right to terminate the contract.
The right to terminate any contract and the effect of the inclusion or omission of such a right will depend very much on the terms of the contract.
Relevant provisions generally might include any express right to terminate on notice or for breach, the duration of the contract, any exclusivity provisions or minimum supply or purchase obligations or rights to change the price.
As noted above, there are a number of factors which may, in practice, make performance of the contract more difficult or expensive. It is possible in such circumstances that a “force majeure” provision included in the contract might provide a right for a party to terminate a contract as a result of the change in conditions, but generally force majeure clauses will only allow a party to terminate a contract if performance of the contract becomes impossible rather than more difficult.
Any provisions relating to termination should not be read in isolation but will need to be read also in the light of any express or implied provisions relating to the consequences of termination.
Renegotiation of Contracts
An alternative to terminating a contract is to seek to renegotiate its terms. Varying the terms of a contract will generally require the consent of the other party, but there may be many reasons why an important customer or supplier will be persuaded of the necessity to discuss changing the terms to address changes in circumstances arising from Brexit.
Putting in place New Contracts
Other than in the case of a long-term contract with exclusivity or minimum purchase obligations which the supplier refuses to negotiate, there will often be opportunities to put in place new contracts with the current or an alternative supplier.
Terms which could be included in new contracts to address changes arising from Brexit include:
- express provisions to deal with the particular risks or changes referred to above for example to pass on the costs of tariffs
- the adoption of alternative Incoterms to reallocate the costs and responsibilities associated with the transportation of goods (noting that a new version of Incoterms has recently been published)
- express termination rights linked to Brexit or the effects of Brexit, (noting that it may be quite difficult to define what constitutes Brexit in a way which covers all of the various forms in which this might take place)
How can we help?
We can assist you in relation to:
- reviewing and advising on your current contracting arrangements
- re-negotiation of your contracting arrangements to mitigate Brexit risks
- drafting new contractual arrangements to address the effects of Brexit
For help and advice please contact us on 08081668827
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