Assuming that there will be some form of ‘hard’ Brexit, the UK’s exit from the single market will likely have a significant impact on the operation of certain contracts.

It is understandable that charities may be concerned about how their rights and obligations will be affected in such a scenario, and what options they may have to minimise the risk of a potential dispute. Whilst specific contractual issues may vary on a case by case basis, there are some general principles which can be applied when navigating this complex area.

It is also prudent to obtain professional legal advice early. Contract disputes tend to escalate very quickly and can have significant implications on time and costs.

Force majeure, material adverse change and ‘Brexit’ clauses

If the impact of Brexit appears likely to cause significant difficulties with the performance of a contract, the first port of call is to see if there is an express term in the agreement that can help. These are sometimes known as ‘force majeure’ or ‘material adverse change’ provisions.

A force majeure clause sets out what happens if there is an event rendering performance of a contract impossible. These are usually events beyond the reasonable control of the parties and are often explicitly detailed, such as an act of God, war or riot. Usually a force majeure provision allows a party to suspend performance or excuse liability for non-performance rather than provide for the party to automatically escape the contract. This may be useful if the consequences of a ‘hard’ Brexit are relatively short-term, however, if the contract is realistically going to become unworkable going forward, the parties will need to think of other options. Also, for a force majeure clause to apply to Brexit, there would likely need to be an express reference to it in the contract.

Material adverse change clauses, on the other hand, provide parties with powers such as the ability to renegotiate terms of a contract if it becomes unprofitable or subject to a change in the law. On the face of it, this would seem to suit a ‘hard’ Brexit scenario, however the exact wording of this clause would need to be carefully considered to determine whether it would apply.

Due to the potential difficulties with reliance on these clauses, parties are increasingly seeking to include provisions in their contracts that deal expressly with Brexit. These so-called ‘Brexit’ clauses can take various forms and as well as including options to renegotiate could include a right to termination. If you are currently negotiating a contract which is likely to be impacted by Brexit it would be worth considering whether a Brexit clause would be useful.

Frustration

So in the absence of anything express in a contract, what are we left with?

Frustration arises in a contract when something occurs after the date of the contract, without the fault of either party, that either transforms the contractual obligations into something so radically different to what was intended, or makes the obligations physically or commercially impossible to meet.

It is important to note that a successful frustration argument has a high threshold, and mere inconvenience, hardship, or financial loss will not meet the test. There has already been a significant case involving Brexit frustration before the Court (Canary Wharf), and it was clear that just because Brexit makes the performance of a contract more difficult or expensive will not mean that the parties can escape their obligations (particularly if there are realistically other options under the contract).

It would also be difficult to argue that Brexit frustration could apply to a contract entered into after 2016, as clearly the potential adverse effects of Brexit had been contemplated. For contracts entered into before 2016, or even before there were rumblings of a potential referendum, it may be easier to argue Brexit has frustrated a contract.

Negotiation

It is important to remember that even if none of the above arguments are likely to be successful, there may still be a way to resolve the matter outside of termination and having to pay an exit fee.

Negotiation is always a sensible option and most parties will want to seek an amicable resolution if at all possible before threatening Court proceedings.

It is always important to obtain legal advice as soon as possible to consider the best strategy for reaching a deal.

Conclusion

If you are concerned that any of your contractual arrangements may be adversely impacted by Brexit, or you fear the other party to your agreement may seek to get out of its obligations when the transition period ends, please do get in touch with a member of the Dispute Resolution and Litigation team for advice.