Waste sector businesses are increasingly looking to “Brexit clauses” as a pragmatic solution to the uncertainty created by the UK’s looming withdrawal from the EU.
Historically, hardship clauses have been used most often in international contracts – but in the context of the energy and waste sectors we are seeing the following risk areas being covered:
Concerns surround the impact of Brexit on the foreign exchange rate between Sterling and other currencies (especially where resources in waste are being traded internationally). Clauses addressing these risks can take on several forms including:
- recording the parties’ intentions to renegotiate (for a period) before triggering any termination right.
- agreeing a specific action resulting from the Brexit-related trigger event: for example, adjust the pricing mechanism to take account of specific decreased offtake income. This approach has the advantage over a more general hardship clause as the disadvantaged party is not in a position where it simply has to continue to perform the contract pending further agreement and negotiation.
- a freezing clause which essentially freezes the exchange rate and so the price paid would always be based on that exchange rate irrespective of fluctuations in the two base currencies.
- a price adjustment clause which enables the contract price to be adjusted (potentially upwards or downwards) to changes in the exchange rate.
In all cases, there needs to be clarity as to: when the clause is triggered; whether the adjustment is automatic or subject to agreement; which currency exchange rate is to be used.
Change in law and economic impact
Suppliers of waste services engaged on longer-term contracts will be concerned that the as-yet unknown and unqualifiable impact of Brexit will affect both prices of the services, and treatment and disposal of the waste. For example, tariffs may be imposed on waste transported across national borders, but the cost of those tariffs is not yet known.
Some suppliers are seeking to back-off the risk of price-volatility by entering into longer-term agreements with their own sub-contractors. This is no panacea: if a key sub-contract terminates early for whatever reason – for example insolvency of the sub-contractor – the supplier will need to procure replacement supplies at the commercial rates in play at the relevant time.
Other suppliers have sought clauses which enable them to claim additional costs from their clients where there is an “Economic Change”: broadly a change in price for services where that change in price is the result of Brexit triggered economic changes. Some clauses go further, including changes in prices which result from “political change as a result of Brexit” within their scope. Following an “Economic Change”, the supplier is able to increase the prices charged to its client by reference to its own increase in costs.
When reviewing these clauses, consider:
- how are the claimed increases to be evidenced? Ideally the contract would set out a reliable benchmark showing the costs of supply to the supplier as at the date the contract is entered into with the client; and
- are the changes in prices permitted if they “directly or indirectly” result from Brexit? Referring only to price increases “directly resulting from Brexit” is a recipe for disagreement: could a supplier ever successfully argue that an increase in cost “directly” results from Brexit?
“Legislation Change” clauses will often go hand-in-hand with “Economic Change” clauses.
Legislation Change clauses are an adapted form of “Change in Law” clauses, which are a frequently seen and established part of medium and long-term waste contracts.
At their essence, Legislation Change clauses will be defined as a change in Law as a result of Brexit, so that if there is an increase in the costs of performance due to a Brexit-related law (perhaps because the post-Brexit regulatory landscape increases the burden on businesses), the supplier can recover the additional cost from the client.
As with Economic Change clauses, evidencing the claimed increases and showing a law is a Brexit -related change in Law (as compared to a change in Law occasioned by a change in policy and/or government) could well be problematic.
Take away points
(1) Consider whether there is value, in your sector, of trying to introduce clauses of the above nature into your contracts.
(2) If you see these clauses introduced by your commercial counterparties, take legal advice – we are seeing a range of positions being adopted on these issues.
(3) Supply chain contract management will become increasingly important in the post-Brexit landscape, particularly if the chain of contracts becomes cross-border at some stage (because UK legislation will begin to diverge from EU legislation). If they are not cross-border, clauses of the above nature appearing at any stage of that supply chain could impose a significant burden on one of the supply chain members.
Jonathan Croley is an Associate at Ashfords Solicitors