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18 March 2019
Irish businesses trying to navigate the current Brexit landscape should consider the impact of events on their contractual relationships. This is an issue with potentially significant consequences.
With Brexit fast approaching, many Irish businesses are wondering whether the fact and form of Brexit will – in itself – constitute an event which operates to discharge parties from their obligations under commercial contracts.
Unforeseen events which occur after a contract has been entered into may be used by a disadvantaged party to argue that performance of the contract has become impossible, illegal or radically different from that originally contemplated, such that the contract has been discharged by the operation of the doctrine of frustration or by reason of force majeure or material adverse change (MAC) clauses.
Ultimately, the question of whether these types of clause can be triggered in Ireland due to Brexit will depend on the relevant clause's wording. It is unlikely that Brexit in and of itself would trigger such clauses, absent specific wording to that effect. However, it is possible that legal changes that occur because of Brexit, and the impact of such changes in Ireland, may trigger those clauses.
A frustrating event would generally be one which the parties could not have foreseen when entering into the contract.
A contract will not be frustrated merely because performance has become more expensive or because changes to economic conditions have occurred. Rather, for a frustration argument to succeed in Ireland, it must establish that an event has occurred of sufficient seriousness that it renders performance impossible or the obligation fundamentally or radically different from what was agreed to when the contract was entered into. For example, currency fluctuations are less likely to be a frustrating event than an inability to source products that meet revised regulatory standards.
The doctrine of frustration is a narrow one and the burden of proof is onerous. There is little case law on the doctrine of frustration. One reason for this is that commercial parties have, for many years, sought greater contractual certainty by including express termination rights in agreements, through force majeure or MAC clauses, where an adverse event arises.
Force majeure clauses generally operate to excuse the performance of particular contractual obligations when certain specified events occur that are beyond a party's control. However, there is case law to the effect that a change in economic circumstances which affects the profitability of a contract or the ease with which the parties' obligations can be performed in Ireland, does not constitute a force majeure event in the absence of express wording to the contrary.
Similarly, MAC clauses are designed to relieve a party of its obligations when an unforeseen adverse event occurs. These are common in finance documents. For example, where the prospects of a business have been materially and adversely affected by Brexit, an Irish lender might wish to rely on a MAC clause to limit its ongoing exposure to that business.
In the event of a no-deal Brexit, it is clear how it might be argued that this constitutes an unforeseen adverse event in Irish contracts that were entered into prior to the original Brexit vote in the United Kingdom.
However, for more recent contracts, it will be more difficult to argue that this possibility could not have been foreseen and, for this reason, 'Brexit clauses' have been included in commercial contracts more frequently in recent months.
Impact of Brexit clauses in Ireland
Irrespective of whether a no-deal or negotiated withdrawal occurs, Brexit has the capacity to affect almost every aspect of doing business in Ireland (although of course some sectors and industries are more susceptible than others).
Parties often have a term in their contracts by which, on the happening of certain events, they may be:
Since the 23 June 2016 vote, Brexit has featured in the list of such events in many Irish commercial contracts.
Alternatively, some commercial contracts have incorporated bespoke Brexit clauses to trigger automatic changes to a contract. A Brexit clause might simply provide for a requirement that the parties will seek to renegotiate certain relevant aspects of the contract, failing agreement on which the contract may be terminated.
For such clauses to be effective and enforceable in Ireland, it is essential to define the 'trigger event' clearly. Some common trigger events which are being used as a result of Brexit contingency planning include:
Other contractual quagmires
Irish parties must also consider the following potential issues and questions:
Unprecedented events are unfolding and the outcomes for Ireland are far from clear. However, it is clear that Brexit will directly or indirectly affect most, if not all, transactions between Irish and UK businesses or Irish businesses doing business in the United Kingdom (including Northern Ireland).
Irish suppliers must consider not only events which may directly affect them, but also their supply chain. Further, customers must consider not only possible affects on their own ability to use goods or services purchased under an agreement (and whether the price they are paying will remain competitive), but also how the market for their own products may be affected.
An audit of contracts, both in the pipeline and already in place, as well as a high awareness within businesses as to any contractual relationships which are already under pressure due to Brexit-related events in Ireland, is advisable. This should be stress tested in the context of both no-deal and negotiated Brexit outcomes.
At a minimum, Irish businesses should:
Ultimately, there is no single solution for Irish business and each contract and solution must be tailored for each individual business.
For further information on this topic please contact Anne-Marie Bohan, Julie Murphy O'Connor, Karen Reynolds or Gearóid Carey at Matheson by telephone (+353 1 232 2000) or email (email@example.com, firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). The Matheson website can be accessed at www.matheson.com.
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