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 decision to trigger Article 50 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. On 29 March 2017, the UK Government served formal notice under Article 50 of The Treaty on European Union to terminate the UK's membership of the EU (following the June 2016 UK referendum on EU membership). Based on Article 50, the EU Treaties shall cease to apply to the UK and the UK exit will take effect in March 2019 (subject to the unlikely possibility of the withdrawal agreement being concluded sooner and unless all Member States agree to extend the period). Negotiation of a new trade agreement with the EU could take several years beyond 2019 although the Prime Minister has declared the objective of achieving such an agreement within the two-year period. 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 on the date of the UK's withdrawal from the EU.

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.


Previous Dispute Resolution Essentials briefings: