Does Brexit constitute a force majeure event in supply chain contracts?

By Jonathan Speed, Simon Shooter, Katrina Baxter

05-2019

1. Introduction

Uncertainty around what a Brexit deal will look like still lingers over the British public. The true impact on EU-UK trade will inevitably depend on the relationship struck, however businesses are already planning for the worst. This is particularly true of businesses and organisations that rely heavily on complex supply chains for the delivery of goods and parts, where any delay at the UK border could be critical to a supplier's ability to perform its obligations to its customer and the customer's ability to deliver to the end user. The perceived danger is a by-product of adopting just in time delivery where you have liquidated damages in your contract for failure to meet the just in time requirements.

Areas in which this will impact most heavily are likely to be the automotive sector, the food sector and the electronics sector.  A common question we are posed by both suppliers and customers is whether Brexit constitutes a force majeure event in commercial contracts? We explore this further in this article.

2. Force majeure clauses - what are they?

Force majeure clauses generally operate so as to suspend one or both parties from performance of particular contractual obligations following the occurrence of certain events that are beyond a party's control. In such an event, that party will not be liable for its failure to perform its obligations while the impact of the force majeure event continues. Most force majeure clauses will also give a right to terminate the contract if the force majeure event persists for a specified period of time. By providing express termination rights, force majeure clauses allow the parties to achieve more contractual certainty.

Categories of event which are commonly included in the definition of a force majeure event and which might occur in connection with Brexit include acts of government, restriction, suspension or withdrawal of any licenses, changes in the law or changes to regulations. It is not enough to have an event falling within the definition of a force majeure event for the clause to come into play. The clause will only be triggered if the event prevents, hinders, or delays a party performing its obligations. A force majeure event must also be the sole cause of the failure to perform an obligation (Seadrill Ghana Operations Ltd v. Tullow Ghana Ltd [2018]).

In the absence of a force majeure clause there are limited remedies available under English law when a contract becomes impossible to perform. Although the doctrine of Frustration is cemented into English law, it is a very difficult test to meet. It applies where an event occurs after the contract has been entered into, which is not due to the fault of either party, and which renders further performance impossible or illegal, or makes the relevant obligations radically different from those contemplated by the parties at the time of contracting. In such an event the parties are relieved from performance of contractual obligations.

The recent case of Canary Wharf (BP4) T1 Limited and others v European Medicines Agency [2019] is one of the first in the UK to grapple with the commercial ramifications of Britain's departure from the EU and illustrates just how narrowly construed the doctrine of Frustration is. The European Medicines Agency ("EMA") argued that their 500 million-pound lease in Canary Wharf was frustrated as they had to relocate to Amsterdam due to Brexit. The court accepted that the EMA's position would of course be materially and adversely affected by Brexit, but that their capacity to deal with the property remained. Mr Justice Smith held that the EMA's decision to relocate was not in fact a legal necessity and pointed out that, not only was Brexit a foreseeable event at the time the parties entered into the contract, but the lease also contained express provisions catering for the involuntary departure of the EMA from the UK in circumstances beyond its control. The court, therefore, did not allow the EMA to use Brexit as an excuse to break its lease with Canary Wharf.

3. Force majeure and Brexit

In the event of a "Hard Brexit" where the UK would leave both the Single Market and the EU Customs Union, falling back on the World Trade Organization ("WTO") rules, the impact on trade will be the most disruptive. Sectors set to experience the biggest disruption in exports and imports are those concerned with motor vehicles and parts, electronic equipment and processed foods. Import and export duties may be imposed which could make goods and services more expensive to supply into the UK or the EU.

For example, under WTO rules, cars could be taxed at an extra 10% when they crossed the UK-EU border, forcing some manufactures to look at moving production out of the country. Agricultural tariffs could also be significantly higher, rising to an average of more than 35% for dairy products. Further, the potential delays of goods crossing the UK border could put suppliers in breach of their contractual obligations to their customers with the result that production lines have to be suspended because parts are not available in time. Losses consequent on such delays could be significant. The question is: do these events trigger a force majeure clause?

The answer will ultimately depend on the drafting in the force majeure clause. It is possible that the standard wording below could in theory be invoked by Brexit:

"Neither party shall be in breach of this agreement nor liable for delay in performing, or failure to perform, any of its obligations under this agreement if such delay or failure result from events, circumstances or causes beyond its reasonable control, including but not limited to: …any law or any action taken by a government or public authority"

For example, if an EU car manufacturer were delivering parts to Dover on a just in time delivery contract, but suffered delays in doing so because of the effects of Brexit, there is argument that the above clause could be relied upon. However, the car manufacturer would need to show that: (a) Brexit was the sole cause of the delay; (b) as a result, the contract had prevented or significantly hindered the car manufacturer from performing its obligations; and (c) reasonable steps had been taken to mitigate its effects.

Following Thames Valley Power Ltd v Total Gas & Power Ltd [2005], where a force majeure clause in a gas supply contract was held not to bite where performance had become "economically more burdensome," it is generally accepted that events which make the contract more onerous or less profitable, including currency and price fluctuations, will not constitute a force majeure event if the contract remains physically and legally possible to perform. Therefore in the scenario above, the car manufacturer will have to pinpoint to something beyond economic hardship as for the reason of the delay.

4. Contracting for Brexit

In existing commercial contracts where Brexit is expected to have a material impact, parties should be talking to seek to agree adjustments and work arounds before having to rely on a force majeure clause. It will be in both party's interest to find a commercial and practical solution, which might involve an amendment to the original contract in order to mitigate your losses.

Where consequences of Brexit can be predicted to have a negative effect on the performance of the contract, parties should consider if they wish to provide for that in the drafting.  In new contracts, there is nothing to prevent specific Brexit related events being drafted in as a force majeure event. Given the friction at the border concern, many force majeure clauses in future contracts are frequently drafted to relieve the supplier of liquidated damages if their deliveries have been affected by a change of government policy that slows down border clearances and thereby interrupts delivery.

5. Conclusion

Whether or not Brexit will trigger contractual force majeure rights will ultimately depend on the wording in the clause and the specific facts at hand. If negotiating future contracts, attention must be taken when drafting boilerplate force majeure clauses. If Brexit is to have an underlying effect on your contract, especially if it will undermine the commercial bargain made by the parties (which may be the case where import tariffs are increased), express provisions will need to address these impacts. If you are in current contracts and feel that you are in line for a Brexit impact and the contract does not help you, a grown up chat between the parties is needed. Freezing like a rabbit in the headlights leads to people being run over.