DR Essentials: Negotiation and Termination of Contracts in Uncertain Times

20 September 2016

Rachel Glass, Jack Colthurst

Bird & Bird & First for Disputes

The UK's Brexit decision has raised uncertainties in commercial contracting which are unlikely to dissipate for some time. As a result, many companies are looking to exit existing contracts, or to future-proof contracts currently under negotiation. Rachel Glass and Jack Colthurst will be discussing the creation, preservation and exercise of termination rights against the shifting landscape of the Brexit process.

The myriad potential forms and outcomes of Brexit remain the subject of speculation. The current expectation is that the UK will not notify the European Council of its intention to withdraw from the EU during 2016, and that the full two year period anticipated by Article 50(3) of the Treaty on European Union will be needed for negotiations. That suggests that actual Brexit (whatever form it may take) is unlikely to take place before 2019. This raises the practical question of how contracting parties can prepare for a potentially seismic shift in the legal, political, and economic landscape that may take place more than two years from now.

Brexit is a "known unknown", but it is possible to anticipate likely issues for a particular business or bargain, and to plan for them. One issue that is likely to arise is the desire of a party to terminate a contract in the wake or the anticipation of Brexit. An economic shift or change of law may make that party's bargain less profitable, or even impossible, or the underlying purpose of the contract may have fallen away. In such circumstances, and in the absence of some defect in performance or other substantive breach by its counterparty, a party may seek to use the consequences of Brexit to justify exiting a contract.

There are a number of practicalities and legal arguments which may arise in relation to lawfully terminating existing contracts, either in anticipation of or in the wake of Brexit. They may include consideration of Material Adverse Change clauses, Force Majeure clauses, and whether the doctrine of frustration is relevant in this context:

Material Adverse Change clauses: Could the particular consequences of Brexit for a party be sufficiently significant to constitute a Material Adverse Change and what factors are the Courts likely to consider in construing these clauses? Could they safely be relied upon in the Brexit context?
Force Majeure: Force majeure has no specific legal meaning in English law, and so the precise drafting and framing of the clause will be determinative in whether it could be relied upon by a party.

Frustration: What would a party have to show in order to demonstrate that specific consequences of Brexit have caused its contract to be frustrated? How likely are such arguments to succeed, particularly where the obligation is the payment of money?

A party that purports to terminate in wrongful reliance on one of these arguments risks a response in the form of a claim for repudiatory breach for wrongful termination. The consequences of an error are therefore serious, and the question of how best to position oneself for termination can be a difficult one. The question of how to respond to a termination of this type from a counterparty is also likely to arise. 

The other question that arises is how to approach drafting a contract that is yet to be concluded. "Brexit termination" clauses may be introduced:  how might they work, what might they say, and what should they definitely not say? There is an inherent difficulty in attempting to construct a contractual definition of Brexit, so negotiating parties must consider drafting termination rights for specific potential consequences, in order to bolster their prospects of being able to rely on them successfully.

Whilst there has never been a Brexit before, this is not the first time that the economic and legal landscape has been clouded in uncertainty. Are there any lessons to be learned from past economic events?

What this means for you

We will be exploring the issues identified above in greater detail at our DR Essentials Breakfast briefing on 28 September 2016. At this session, Rachel Glass and Jack Colthurst will be talking about some of the practical steps that parties can take to position themselves for a potential termination in either the anticipation or the wake of Brexit, and the creation, preservation and exercise of termination rights in these uncertain times.


Previous Dispute Resolution Essentials briefings: