Brexit - Termination clauses in new contracts

For businesses, terminating non-profitable contracts following a no-deal Brexit may be an option to reduce disruption.

As the uncertainty around Brexit continues, it is important that businesses analyse what, if any, impact a no-deal Brexit could have when entering into commercial contracts. There are many ways in which businesses can be affected by Brexit, including challenges around logistics, negative impact on supply chains, increased administrative costs, tariffs and duties all of which carry significant risks.

For businesses, it is fundamental that contracts continue to be commercially viable in the event of a no-deal Brexit. If the contract is no longer profitable following the impact of a no-deal Brexit, options are needed to protect and minimise any disruption as much as possible. One option could be termination. We detail below some points to consider around termination when entering into commercial contracts.

Cause

Under most contracts, there are certain prescribed causes which allow a party to terminate the contract early. These often include material breaches of obligations. There are usually provisions which allow for these breaches to be remedied within a certain period of time e.g. 30 days of being notified. We recommend revisiting obligations before entering into a contract and reviewing whether a breach situation could arise due to any obligations being delayed or affected by Brexit. It is important to review provisions that require services to be provided within a timeline which may become impossible. In this case, an option could be to seek to insert more realistic timelines and longer periods of time to remedy breaches. Another option may be to include a provision to suspend services to renegotiate terms in certain circumstances, rather than proceeding directly to termination. 

Price

The contract price agreed requires detailed consideration to ensure that the contract remains commercially viable despite import and export duties and currency fluctuations in the event of a no-deal Brexit. A pricing mechanism could be built into the contract. Ultimately, clear and express provisions are needed permitting termination if the contract is no longer viable.

Convenience

To allow the most contract flexibility, an appropriate termination clause for convenience with reasonable notice could be considered. This allows the greatest flexibility as no reason or evidence of breach is required and this protects the business should the contract no longer be commercially viable.

Force majeure

Force majeure clauses are intended to suspend one or both parties from performance of the contract following an event that is beyond the control of a party i.e. strikes, earthquakes, flooding etc. Force majeure clauses are often misunderstood and we have recently seen another party try to argue (unsuccessfully) that a scheduled factory shut down could amount to force majeure. The event must hinder or delay the performance of the affected party.  A force majeure clause cannot be relied upon to terminate due to the negative effects of Brexit on the contract. Instead, bespoke express provisions within the clause would need to be drafted to allow termination for force majeure due to Brexit.

The key to drafting the most beneficial termination provision is to undertake an in-depth analysis of both parties’ obligations, roles and risks under the contract in question and then to ensure that the drafted provisions properly cover all of these matters. Whilst termination is a nuclear option, in some circumstances this will be the only option rather than be bound by an unprofitable or risky contract.  

If you have any questions or would like to know more about our update, please contact Maxine Buckton, Solicitor and author of this update, on 0113 213 4053, or maxine.buckton@weightmans.com, or Jacqui Bickerton, Principal Assocaite, on 0151 242 6846, or jacqui.bickerton@weightmans.com. You can also visit our Brexit Hub for all the latest updates and news.

Further information - Supply chain

Weightmans is pleased to announce the launch of a new, national report “Weightmans evolve: The supply chain of the future”. The report highlights experiences and opinions from supply chain leaders, sector experts and our very own legal specialists. Download a copy of the report.

If you have any questions or would like to discuss any aspect of this article, please contact:

Tristan Feunteun, Partner at tristan.feunteun@weightmans.com or 020 7842 0840,

Andrew Roberts, Partner at andrew.roberts@weightmans.com or 0151 243 9840 or

Matthew Williamson, Partner at matthew.williamson@weightmans.com or 0151 243 9883.

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