Contractual Relations

Effect on Contracts

Brexit is likely to have an effect on many existing or ongoing contractual relationships between businesses in Ireland and the United Kingdom. The possible implications of Brexit are very much dependent on the nature and terms of the contract and the particular circumstances.

Most orders and jobs are distinct contracts, so that while there is a risk that a particular job may become unprofitable in the even of a sudden Brexit, in most such cases the potential loss is limited to that job. In other cases, there are standing terms and conditions, perhaps fixed pursuant to a tender, which binds a business to supply at a particular price over a prolonged period.

The impact may be at several different levels. At the most basic level, Brexit may impact on the commercial terms of a contract. At an economy-wide level, a hard Brexit may lead to a further significant exchange rate movement. It will lead to the imposition of tariffs on the cross-border movement of goods in many sectors. The manner in which VAT is changed and collected will change, which may have adverse costs an more commonly cash flow implications.

A hard Brexit will bring significantly increased regulatory compliance burdens costs in some sectors. The export and import of goods to and from the UK will be subject to customs controls, declaration presentation and release procedures in the event of a hard Brexit.

Most businesses will not have the requisite facilitation for the lighter touch regimes in customs handling. The customs authorities are likely to be overburdened which could lead to very significant delays and backlogs.

Customs Processes and VAT

The cost of import and export customs duties and processes may be considerable. They will apply in both Ireland and the UK in every commercial movement across a border.  The incidence of VAT will change for B2B sales and many B2C sales.

In this context the terms of the contract will be critical. If the seller, has for example has agreed to deliver the goods in the other jurisdiction for a price, then the incidence of both export and import processes in both jurisdictions, as well as liability to import duty and VAT in the jurisdiction of import may fall entirely on him or it.

Many B2C sales may cease to feasible or economic, in the absence of an importer or customs representative in the other jurisdiction to take responsibilities for import procedures.

Terms of Sale / INCOTERMS

For the reasons set out above, the obligations of seller and buyer in cross border sales will be critical. In international trade, the INCOTERMS are used worldwide as shorthand to incorporate specific defined obligations of the seller and buyer in relation to a range of issues, including customs responsibility.

The INCOTERMS are dealt with other sections of this website.  At one end of the spectrum,  “ex works” means that the seller makes the goods available at its premises and all processes are undertaken by or on behalf of the buyer. At the other “Delivered Duty Paid”  places all obligations on the seller.

Many of the INCOMTERMS  are aimed primarily at longer distance trade where the seller completes export obligations to a defined point and the buyer undertakes import obligations from that point.

Goods no longer Compliant

Goods which are now deemed compliant with standards may cease to be compliant in the EU or the UK. Compliance with regulatory standards may be defined in terms of the goods originating in a particular way and being subjected to an EU approval process.

Depending on the sector the UK standards bodies may cease to have authority to approve particular classes of goods for use in the EU. While the UK has enacted withdrawal legislation to ensure continuity of law, it may be unwilling to afford equivalent recognition to EU goods if the EU does not afford the same recognition to UK goods.

In some cases, it may be that the goods from the other jurisdiction (EU or UK ) are no longer compliant with the terms of the relevant supply contract. Depending on the circumstances and interpretation this may lead to a breach of contract or in some cases termination on the grounds of frustration.

Brexit may have implications pursuant to the terms of particular contracts. The fact that the UK is no longer part of the European Union may have implications which depend on the wording of particular contracts. Depending on the circumstances the legal consequences may be to frustrate and terminate the contract or to cast a greater burden on one party but not give rise to an option to terminate.

Commercial Risks and Contractual Responsibility

In the absence of specific terms of the contract providing relief, such risks are generally considered commercial risks and will fall on one party without any relief under the contract. The supplier may be obliged to acquire and supply compliant goods. It is only where performance is impossible at any price that the contract is discharged by frustration.

In the absence of the substitution or continuation of the EU wide judgement enforcement Regulation,  judgements made in by the UK) courts may not be as readily enforceable against the assets of the defendant in other EU states than is now the case.

The general principle of contract law is that contracts are to be enforced in accordance with their terms and that external factors which make performance inefficient or highly loss-making do not excuse the obligation. The contract apportions the risk by its terms, and if that turns out to be to the benefit of one party and the cost of the other in a wholly unexpected way, then this is not usually a ground to terminate the contract or obtain other relief.

Frustration

There is a common law principle of frustration which may apply where performance becomes impossible or wholly meaningless. It is however very narrow by its terms. Anything short of these criteria is not generally enough to discharge the responsibilities of the party with obligations.

The test for frustration or force majeure requires impossibility of performance or performance that removes the very purpose of the contract and renders it wholly different. It must be caused by something that occurs after the date of the contract outside the contemplation of the parties, not to due to the fault of either party. It must be something on which neither party expressly or impliedly takes the risk on.

Excusing Clauses

Commercial contracts commonly have clauses providing for so-called force majeure circumstances. The particular wording employed may vary from case to case and will determine its actual effect. Commonly used expressions such as “force majeure” contemplate something close to the common law principle of frustration or impossibility. Economic hardship and the inability to perform due to external circumstances which are not the fault of the party concerned, do not excuse the contractual obligations.

In the absence of excusing clauses or the common law principle of frustration, the party who fails to perform his obligations must compensate the other party for direct economic loss thereby sustained. Inability to perform is not generally any excuse.

In many cases, there are general terms and conditions and specific orders which incorporate those terms. In those cases, a hard Brexit may intervene while some orders are ongoing. Apart from contractual issues of obligations to perform those ongoing contracts economic and commercial reality may determine whether future orders are placed.

In principle, terms could be included in contracts to future proof against a hard Brexit and provide for its consequences. This, however, may not be practicable to negotiate in most cases. Where feasible, the parties may provide for a Brexit termination clause. Its terms would have to be considered with reference to the commercial circumstances.

The circumstances to which it applies would have to be defined. The may be a right for one or both parties to terminate. It may be immediate or after notice. One or other party may be obliged to compensate the other in a defined amount. The may be obligations to endeavour to renegotiate before terminating. An obligation to negotiate is rarely binding as a contract in itself.

Choice of Law

In commercial contracts, the parties are entitled to choose both the law that applies and the courts or forum (which may be arbitration or other alternative dispute resolution) that is to adjudicate in the event of a dispute. In consumer contracts, EU derived legislation provides in most cases that the governing law and the courts where the contract is enforced should be that of the consumer party.

English contract law by itself is unlikely to be affected by Brexit. The choice of law in a commercial contract is likely to continue to be respected.

In the event of a hard Brexit, the UK may cease to be bound by and have the benefit of the Brussels Regulation on the enforceability of civil judgements. This may be a very significant limitation as the judgement may not be enforceable. Similar issues apply in respect of other conventions such as that in relation to Switzerland.

Cessation of Authorisations

Issues may arise when parties to a contract cease to be qualified to provide particular services or goods. Questions may arise as to whether this may terminate or invalidate ongoing contracts. Where there is a supervening change in the law which makes performance legal impossible, the principle of frustration may apply.

Where frustration applies, the parties are excused from further performance. The impossibility of performance must be something completely unexpected and must not be such that neither party implicitly took the relevant risk on it. In some circumstances,  relief may be given in the event of frustration by way of restitution to unwind unjust enrichment

Frustration is not available simply because the contract becomes much more burdensome on one party. It must be the case that the contract is impossible to be performed or that performance would be fundamentally different to that which has been envisaged. It is not enough that its value or profitability has changed.

Regulation, Legality and Contracts

A distinction must be drawn between circumstances where a contract is specifically prohibited because of the change in the law effected by Brexit and one where external circumstances make it very burdensome or unprofitable. In the latter case, the general position is that the loss will fall on the party who has undertaken the obligations concerned.

Until recent years, the approach both in Britain and Ireland was that where the law invalidated or rendered illegal a contract or its performance. the loss would fall where it lay. The courts took the view that they would not enforce a contract on account of illegality. However, over time, the courts recognised that legislation might be passed for different purposes, in particular, to protect one party to an agreement over the other. In this case, it may be appropriate to enforce a contract for the benefit of the weaker protected party while not permitting the other party to recover.

New Approach to Effect of  illegality

In the Quinn v IBRC, the Supreme Court considered whether the presence of an element of illegality should lead automatically to non-enforcement by the courts. The courts indicated that they would consider whether the legislation expressly provided that contracts of a particular type were void and unenforceable. If this was the case, then the courts may not enforce them.

If the relevant legislation is silent, the court must consider whether the requirements of public policy and the policy of legislation concerned as may be gleaned from its terms require that in addition to whatever consequences are provided in the legislation, the  additional sanction and  consequence in the form of treating the relevant contracts as being void or unenforceable must be imposed.

In assessing the criteria court should take account of the following

• whether the contract in question was designed to carry out the very act which the legislation was designed to prevent;
• whether the wording of the statute may be taken to strongly imply that the remedies and  consequences specified in the statute are sufficient to meet the statutory end
• whether the policy of the legislation is designed to apply equally or substantially to both parties to a contract whether that policy is exclusively or principally directed towards one party.

Legislation which is designed to impose burdens on one category of persons for the purpose of protecting another category may be considered differently from legislation which is designed to place a burden of compliance with an appropriate regulatory regime on both parties. The court considers whether the imposition of voidness or unenforceability may be counter-productive to the statutory aim as found in the statute

The court might also consider whether having regard to the purpose of the statute the range of adverse consequences for which express provision is made might be considered in the absence of treating relevant contracts is unenforceable to be adequate to secure those purposes. It may consider whether the imposition of voidness or unenforceability may be disproportionate to the seriousness of the unlawful conduct in question in the context of the relevant statutory regime

Brexit and Contractual Relations

The above are criteria which would be applied in cases where Brexit introduces some unlawful element in a contract. In the case of ongoing contracts, the most likely consequence is that they would be discharged from future performance if they are expressly rendered void by the legislation.

In other contexts, the issue of some incidental illegality arising will be considered with reference to the above criteria. In broad terms courts no longer automatically refused to enforce contracts where there may be some collateral element of invalidity. It will consider whether this is the hypothetical and presumed intention of the legislation in the circumstances.