Following the result of the UK general election, the upcoming Brexit negotiations, which were due to start in over a week’s time, have now been thrown into doubt. Nevertheless, businesses are still analysing the impact that Brexit will have on both existing and future commercial contracts. This has led to businesses now exploring the possibility of incorporating a “Brexit clause” when negotiating a new contract or amending an existing contract that allows parties to renegotiate terms in the event of a defined Brexit-related event (i.e. the date of the UK’s formal withdrawal from the EU).

What would a Brexit clause look like?

The make-up of this clause has generated significant discussion – should parties grant a reciprocal right to walk away from the contract at the point of the UK’s official exit? Alternatively, at the same point, can the parties agree to re-negotiate terms of the contract? It seems neither of these option would be particularly desirable:

  • whilst the granting of a reciprocal right would provide clarity in a contract, it would also create a lack of certainty with neither party knowing when the other will exert its right. If one party is looking for a convenient reason to re-negotiate or exit a contract, counterparty may feel that the Sword of Damocles is constantly hanging over its head.
  • the insertion of a provision stating that the parties will agree to negotiate in the event of a member state’s exit from the EU could be deemed to be an “agreement to agree” and would likely be unenforceable as UK courts will not force parties to agree (as was recently reaffirmed in Teekay Tankers Ltd v STX [2017] EWHC 253 (Comm)).

Is there an alternative?                      

Whilst the debate rages on about the structure of a Brexit clause, one possible alternative has sprung up. This involves the parties adopting a clause which encourages them to agree to re-negotiate terms between themselves but, crucially, if they fail to reach an agreement, an independent expert would be appointed and asked to (i) make a determination as to whether the Brexit clause can be triggered and (ii) what would be considered fair amendments to the terms of the contract.

On the face of it, such a clause would still not address practical issues, such as the scope or boundaries of the expert’s powers, and parties would be wise to ensure that such issues are dealt with as part of the proposed Brexit clause.

However, in a recent judgment where two parties had agreed a renegotiation clause that allowed for an arbitrator to be appointed in the event that amended terms couldn’t be agreed, the UK courts decided that, although this makes the clause much harder to interpret, it would not render a clause to be unenforceable (Associated British Ports v Tata Steel UK Ltd [2017] EWHC 694 (Ch)).

Watch this space…

It remains to be seen whether a model Brexit clause will appear over the coming months as negotiations take place between the UK and EU. As with any change clause, it remains susceptible to interpretation and such a clause will likely continue to evolve as businesses wait for more clarity as to the post-Brexit landscape.