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Brexit could be frustrating … in more ways than one

We know that “Brexit means Brexit” – but how will whatever “Brexit” actually turns out to mean affect the parties to wine agency, distribution or supply agreements?  In particular, will it enable them to escape from contractual commitments which become unpalatable in the post-Brexit world?

Existing agreements

In relation to an existing agreement, the first question is whether it contains a force majeure clause.  If not, the question will be whether a specific event or change in circumstances arising from Brexit could be regarded as “frustrating” the contract.

Frustration

A frustrating event is one that (a) occurs after the formation of the contract, (b) is not the fault of either party, and (c) renders further performance impossible, illegal, or a fundamentally different proposition from what was contemplated when the contract was made.  Such an event brings the contract to an end and releases the parties from their future obligations.

Changes in economic or other circumstances which affect the profitability of a contract, or make it harder to perform, will not usually be classed as frustrating events.  So only Brexit-related events which make continuation impossible, illegal or a radically different proposition would be likely to qualify.  Changes in exchange rates and/or tariffs are unlikely to do so unless they bring the case into one of those categories.  It was because of the very limited scope of the frustration doctrine that force majeure clauses were first introduced into commercial agreements.

Where there is a force majeure clause

Where there is an FM clause, the question will be one of interpretation of the wording of that clause.  It will typically permit one or both parties to suspend performance of the contract in some way, without liability, after the occurrence of an event beyond their reasonable control.  There is often a lengthy list of potential FM events: sometimes briefer, more general wording is used.

Some clauses go further than merely suspending performance, and allow either or both parties to terminate the agreement after a specified period so that they’re free to make alternative arrangements.

The term “Brexit” is actually a loose label used to describe a (very big) bagful of potential changes, primarily legal, but also to international trade and economic, commercial and regulatory conditions.  One must therefore examine whether the wording of the FM clause specifically covers the event or change in question.  The English courts are reluctant to extend the words used in a contract beyond their natural meaning, or to imply words that are not there.  So if the event in question is not expressly covered, it will be difficult to argue that the clause nevertheless does cover it.

Can an existing agreement be varied to cover Brexit events?

Yes, but a variation to that effect must be negotiated and agreed.  Which may not be straightforward.  Where one party to an existing agreement asks the other to agree to a variation, consent is unlikely to be given without a quid pro quo of equal or greater value in return.

(Note however that in some distribution or supply relationships, depending on the terms of any “umbrella” agreement governing the relationship, it may be possible to vary the terms of the individual sale contracts without a quid pro quo necessarily being exacted.)

New agreements

Where a new agreement is being negotiated, the parties have an opportunity to consider any potential Brexit events that might significantly affect their ability or willingness to continue with the agreement, and to include express provisions to deal with them.

If the agreement merely says that if a specified event occurs the parties must negotiate in good faith and try to agree a solution, that will not get them very far.  They may need to go further and provide that if a solution cannot be agreed, one or both will have specific rights – e.g. a relaxation of hard sales targets on the imposition of tariffs, or a right to terminate all or part of the agreement.

Conversely, it may be wise to state expressly what will not constitute a Brexit or FM event and thus not justify a suspension of or escape from contractual obligations.

*Except where otherwise stated, all information given and any legal opinions expressed on this website assume that English law applies.  See Conditions of use.