Brexit as Force Majeure – Boris Johnson’s Act of God?

By Audrey Fick, Associate Editor

Britain must negotiate a trade deal with Europe regarding future commercial relations by the end of 2020, or face expensive disruption with its largest trading partner.  That deadline may be impossible, however, considering that recent European trade deals with Canada and Japan took seven years, and only further complicated by Johnson’s intent to break from European regulatory rules concerning labor, environment, and product safety.  In moving UK commitments to abide by EU standards regarding tax, labor rights, and environment out of the legally binding portion of the Brexit deal into a separate, non-binding political deal, Johnson arranged for increased freedom to diverge from EU norms post-Brexit.  The greater the divergence, the greater the restrictions imposed on the UK’s access to the European marketplace.

Britain and Europe will either strike a narrow deal governing some manufactured goods, or Britain will “crash out” with no deal at all.  In the latter event, companies on both sides of the English Channel will resort to further stockpiling goods in anticipation of choked ports and customs issues, with inability to deliver goods, perform services, or otherwise meet contractual obligations resulting in non-performance.  Concerns regarding allocation of additional costs resulting from time on docks, duties, tariffs, customs, and additional certifications by notifying bodies will give rise to further litigation.

Non-performing parties may seek characterization of Brexit as a force majeure event in order to avoid contractual liability.  The party seeking to invoke suchdefenseneed show that the precipitating event is within the scope of the contract’sforce majeure clause, and establish but-for causation between that event and non-performance.

When determining whether the event is within the clause’s scope, courts look to parties’ intent, specific language, and course of dealing.  Sweep-up or catch-all language, such as “any other cause beyond the Seller’s reasonable control”, will be read in the context of the entireclause to determine whether any of the specifically stated events are reasonably connected to the type of event to which the party now seeks the clause’s application.  While no common law rule maintains that an event need be wholly unforeseeable at time of drafting, an argument for force majeure will be weakened if the event is reasonably foreseeable or reasonably within the party’s control such that they could have made relevant provisions.

Courts typically construe force majeure clauses narrowly, and English law has long maintained that economic changes affecting a contract’s profitability or ease of performance are not force majeure events.  Yet Professor David L. Reed cautions against outright dismissal of Brexit as such, urging consideration that courts have never had to deal with this type of “event” and may weigh contract age, product type, potential mitigation, and history of the parties as influencing factors.

In conjunction with the age of contract analysis, attention will be paid to express inclusion of such an event during drafting.  Particular emphasis will be placed on whether time of contracting occurred during or after the UK’s 26 June 2016 vote to leave the EU and / or 29 March 2017 formal notice of intention to leave under TEU Art. 50(2), either of which would cut against drafters who failed to include relevant Brexit-contemplative provisions.

Omission from the contract’s contingencies of express Brexit-related trigger events reasonably foreseeable at time of drafting bodes poorly for the party arguing for force majeure characterization.  Absence of such an express clause may result in application of the common law doctrine of frustration, but frustration applies only in restricted circumstances and provides limited relief.  Parties currently negotiating contracts would do better to include express Brexit termination provisions now than to attempt later reliance on force majeureor frustration.

Predictions: A post-Brexit spike in litigation relating to interpretation of existing contracts, drafting of new language, and allocation of additional costs will result in the practical damage of Brexit being borne predominantly by small- and medium-sized enterprises (SMEs) unable to afford the expense of protracted litigation.  As such, SMEs and local businessowners will be less likely to survive Brexit’s fallout and its accompanying uncertainty, resulting in disparate impact on the middle- and working-classes and further wealth stratification.  Prevailing large-scale enterprises and newer agile enterprises will absorb their market share.

References:

Simon Beasley, Force Majeure and Brexit, Bolt Burdon Solic.: Blog, available athttps://www.boltburdon.co.uk/blogs/force-majeure-brexit/ (last visited Jan. 29, 2020).

Amanda Cowell & Daisy Wetherill, How to predict the unpredictable: Force Majeure clauses in changing political landscapes, PLC Mag.(Apr. 1, 2019), available athttps://www.whitecase.com/publications/article/how-predict-unpredictable-force-majeure-clauses-changing-political-landscapes (last visited Jan. 29, 2020).

E-mail from David L. Reed, Adjunct Professor of International Business Transactions, Syracuse U. Coll. of Law, to author (Jan. 29, 2020, 12:38 EST) (on file with author).

Edward Evans, What Brexit Will and Won’t Change on Jan. 31: QuickTake, The Wash. Post(Jan. 27, 2020), available athttps://www.washingtonpost.com/business/what-brexit-will-and-wont-change-on-jan-31-quicktake/2020/01/27/01ddec7a-4105-11ea-99c7-1dfd4241a2fe_story.html (last visited Jan. 29, 2020).

Peter S. Goodman, Brexit Is Finally Happening, but the Complicated Part Is Just Beginning, The N.Y. Times(Jan. 29, 2020), available at https://www.nytimes.com/2020/01/29/business/brexit-scotland-trade-eu.html (last visited Jan. 29, 2020).

Practical Law’s Contracts: force majeure, Practical Law UK Practice Note 7-380-6134 (2019).

UNIDROIT Principles, art. 7.1.7.