Latest thinking

 

Latest thinking

Brexit clauses

11 July 2016

Services: Business Structures, Commercial, Complex Contracting

We explore what you need to know about Brexit clauses and why you might need them in your contracts.

What is a Brexit clause?

A “Brexit clause” is a contractual provision which triggers some change in rights/obligations as a result of a defined Brexit-related event. The clause therefore sets out two basic things: (a) the specific Brexit related event triggering the clause; and (b) the contractual consequences of that event.

Are Brexit clauses fundamentally different from other “change” clauses (including Material Adverse Change (“MAC”) clauses)?

No.

Many agreements include provisions addressing the potential impacts of future change, ranging from broadly based MAC clauses to very specific provisions for the impact of change in a particular law or regulation or in the price of a particular commodity. Brexit clauses are just a variation on this familiar theme.

Why use a Brexit clause?

A Brexit clause can provide protection against adverse circumstances arising in connection with Brexit. However, as with any “change” clause, there are challenges. Can the parties define and agree a trigger event which is sufficiently specific to be contractually enforceable? Is it realistic to predetermine the consequences of a future event? What should the consequences be if the event occurs? By their very nature, change clauses can be vulnerable to the parties interpreting them in different ways.

Is “Brexit” an appropriate trigger for change?

Technically, “Brexit” would occur when the UK formally stops being a member of the EU. However, it is currently very unclear what the post-Brexit trading landscape will look like and how Brexit would, in practice, take effect, which makes it more difficult to anticipate precisely what effect Brexit will have on business agreements.

At its most extreme, Brexit could result in all UK laws which have derived from the EU being repealed and barriers to trade and movement of goods, services, people and intangibles being erected between the UK and EU. Equally, it is possible that the UK eventually decides not to trigger Article 50, and remains in the EU, but secures agreement to significant changes. However, both these outcomes currently appear unlikely.

Even if the UK eventually formally stops being a member of the EU, it is probable that many of the UK’s laws and many aspects of the trading position between the UK and EU will remain unchanged, e.g. because UK law needs to remain aligned with EU law to facilitate trade or because the UK law in question is not derived from EU law. It is also likely that Brexit changes will take effect over a period of time rather than on a single day.

Given these uncertainties, it will be difficult for parties to a contract to agree an effective clause which triggers change just by using the simple phrase “if Brexit occurs” as “Brexit” may, in practice, mean different things. It is more likely to be appropriate, and more likely to create an effective clause, to define a specific trigger(s) which is relevant to the contract.

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