Brexit That Contract?
What a Momentus Day
What happens to that contract I signed? Will it still be valid or can I get out of it?
The general position at common law is that a party to a contract is still liable to continue if performance of a contract becomes more difficult. An exception to this is the common law of 'frustration', which automatically ends a contract when an event occurs after the contract has been entered into and this is due to no fault of a party, is beyond their contemplation and goes to the heart of the contract, meaning that performance is impossible, illegal or becomes radically different from what had been contemplated when the parties entered into the contract.
Examples of frustration are when the subject matter is destroyed or unavailable, someone does not have mental capacity to perform or there is a supervening illegality, or where a subsequent change in law or circumstance can stop performance (for example, if there is a war that stops an export contract from being performed).
'Frustration' has been interpreted very narrowly. Given that, many contracting parties have other clauses to deal with a change in situation or unexpected events beyond their control - commonly known as 'force majeure' clauses. Unlike an automatic ending under the law of frustration, force majeure clauses typically give the parties the right to choose to suspend or ultimately exit the contract in the event of a supervening event.
Contracts usually describe the term as an event beyond the reasonable control of a party and often lists some examples such as earthquake, flood or fire.
Can you get out of an unprofitable contract or one that has now become unprofitable as a result of Brexit?
Well, that all depends on the circumstances, but in most cases the answer will be 'No'. Despite force majeure being intended to allow a wider right to get out of a contract than frustration, courts generally like to uphold a contract and stop people from getting out of what is, or has become, a bad bargain. To enable early exiting from binding contractual obligations would create uncertainty.
At this time of uncertainty for business, it is hard to see courts generally allowing people to get out of their commercial contracts left, right and centre due to Brexit. To take a different position would only create more uncertainty.
When might you be able to get out of a contract and when might you not?
Each situation must be considered on a case-by-case basis, but here are a few scenarios:
Brian from Bristol runs a company that supplies medical device equipment. His costs have gone up recently and he wants to use Brexit as an excuse to get out of an unprofitable contract with one of his customers in France, which is costing him money to continue supplying. There is no 'frustration' of the contract. Unless the contract (whether in a force majeure clause or otherwise) expressly gives him a right to exit the contract (such as Brexit being listed as a force majeure event), he will need to continue with it.
Belinda from Birmingham is concerned that her costs have suddenly risen as a result of the pound plummeting. Her business is to manufacture packaging, and she imports a lot of materials for that packaging. She wants to terminate and re-negotiate the contract with her suppliers. Currency fluctuation is one of those business risks that can happen. Again, unless the contract gives an express right to change price, terminate or deal in some way with adverse currency fluctuations, she will have to remain with the contract. Courts will not help someone just because a bargain has got worse. She may want to consider negotiating with the other party to change the currency of payments if there is concern over volatility of sterling. If sharp currency movements are a concern, banks also offer solutions with currency risk insurance.
Lucy in London runs a start-up pharmaceuticals business which has just entered into an agreement with a service provider to help with obtaining grants from EU institutions for British businesses. Lucy is wondering now why she signed up to that contract, as she is going to have to pay for the advice and does not think that her company will be able to benefit. The contract may well have been frustrated and there may be a force majeure event too. The exact nature of the service and the wording of the contract would need to be considered carefully. If she claims that the contract is at an end but it is not, she could end up in breach of contract and could be sued for damages. A better way forward would be to have a sensible conversation with the service provider about amending the contract to look at what grants may still be available, other than those coming from the EU. It may also be the case that there are EU grants still available until Britain actually leaves the EU, which could be some time off. The key is not to make any hasty decisions and get help to discuss options.
William from Watford is a software developer and obtains services from subcontracted service providers based out of Eastern Europe. It has now become much more expensive and he thinks that will get worse with Brexit. William had the foresight when he entered into those contracts to have a break clause if Britain voted for Brexit. He now has to decide whether to invoke that clause and terminate. He may have a limited time to do so, depending on how the clause is worded. He does not have to exit the contract of course - that is a matter for him to decide, but at least he has that option.
These are just four scenarios - there are many more.
Whatever happens, businesses and other organisations should check out their contracts to ensure that their position is looked after, and also build into their contracts they enter now protection against what they perceive as future risks, so they are not left being locked into an unprofitable contract.